Question

Which of the inputs in the Black-Scholes-Merton option pricing model are directly observable?

1. The price of the underlying security
2. The risk-free rate of interest
3. The time to expiration
4. The variance of returns of the underlying asset return
5. The price of the underlying security, risk-free rate of interest, and time to expiration

Answer 1

Answer:

The Correct answer to this Question is Option (e) i.e. The price of the underlying security, Risk free rate of interest and time to Expiration.

Reasoning : Black-Scholes-Merton option pricing model have the following inputs :

1) The price of the underlying security

2) Risk free rate of interest

3) Time to Expiration

4) Volatility i.e. Standard Deviation of returns of the underlying asset return.

5) Strike Price of the Option.

6) Dividend Yield on the stock.

Therefore from the given options in the question Option (d) i.e the variance of returns of the underlying asset return is wrong because in place of variance it should be Standard deviation.

Therefore Option (e) is Correct Answer.