Question

3.3 In the Black-Scholes option-pricing model, if volatility increases, the value of a call option will increase but the value of the put option will decrease. (True / False)

3.4 The Black-Scholes option pricing model assumes which of the following?

1. Jumps in the underlying price
2. Constant volatility of the underlying
3. Possibility of negative underlying price
4. Interest rate increasing as option nears expiration

Answer 1

ANSWER DOWN BELOW. FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

Q3.3

As per black scholes option pricing model.

The premium/value increases depending upon the call option/put option:

For a Call option, there is an increase in premium with an increase in:
1. Underlying asset price.
2. Time to Expiration
3. Volatility of the Underlying.

For a Put option, there is an increase in premium with an increase in:
1. Stike price
2. Time to Expiration.
3. Volatility of the Underlying.

Answer: False

Q3.4:

Black Scholes option pricing model assumes constant volatility of the underlying.

In the case of the binomial model, there is a jump in the underlying price.

Answer: constant volatility of the underlying.