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fm9 8 - the option • Security buyers may borrow any...

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Mini Case: 9 - 8 d. In 1973, Fischer Black and Myron Scholes developed the Black-Scholes Option Pricing Model (OPM). 1. What assumptions underlie the OPM? Answer: The assumptions which underlie the OPM are as follows: The stock underlying the call option provides no dividends during the life of the option. No transactions costs are involved with the sale or purchase of either the stock or the option. The short-term, risk-free interest rate is known and is constant during the life of
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Unformatted text preview: the option. • Security buyers may borrow any fraction of the purchase price at the short-term, risk-free rate. • Short-term selling is permitted without penalty, and sellers receive immediately the full cash proceeds at today's price for securities sold short. • The call option can be exercised only on its expiration date. • Security trading takes place in continuous time, and stock prices move randomly in continuous time....
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