Question

Taking into consideration the Stock Exchange of Mauritius, discuss the relevant alternatives of the BSM approach.

Answer 1

Answer: The black scholes model, also known as the black-scholes-merton (BSM) model, is a mathematical model for pricing an options contract.

1. The option is European and can only be exercised at expiration.

2. No dividends are paid out during the life of the option.

3. Markets are efficient (i.e., market movements cannot be predicted).

4. There are no transaction costs in buying the option.

5. The risk-free rate and volatility of the underlying are known and constant.

6. The returns on the underlying are normally distributed.