Continuous Model: The Black-Scholes-Merton Model

Which of the following is the formula for the price of a European call option under the Black-Scholes-Merton model?

• • C = S N(d1) - X N(d2)

• • C = S e^rt N(d1) - X e^-rt N(d2)

• • C = S e^rt N(d1 + d2) - X e^-rt N(d2 - d1)

• • C = S e^rt N(d1) + X e^-rt N(d2)

Which of the following is the formula for the d1-value under the Black-Scholes-Merton model?

• • d1 = (ln(S/X) + (r + σ^2/2)t) / σ√t

• • d1 = (ln(S/X) - (r - σ^2/2)t) / σ√t

• • d1 = (ln(S/X) - (r + σ^2/2)t) / σ√t

• • d1 = (ln(S/X) + (r - σ^2/2)t) / σ√t

Which of the following is the formula for the d2-value under the Black-Scholes-Merton model?

• • d2 = d1 + σ√t

• • d2 = d1 - σ√t

• • d2 = -d1 + σ√t

• • d2 = -d1 - σ√t

Which of the following assumptions does the Black-Scholes-Merton model make?

• • The underlying asset price follows a geometric Brownian motion.

• • The risk-free interest rate is constant.

• • The volatility of the underlying asset is constant.

• • All of the above.

Which of the following is NOT a limitation of the Black-Scholes-Merton model?

• • It does not take into account dividends.

• • It does not take into account transaction costs.

• • It does not take into account taxes.

• • It does not take into account the possibility of early exercise.