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NEW QUESTION: 1
Which of the following is NOT an assumption underlying the Black Scholes Merton option valuation formula:
A. The option can be exercised at any time up to expiry
B. There are no transaction costs
C. There is no credit risk
D. Volatility of the underlying and the risk free interest rate is constant
All the choices listed are valid assumptions underlying the BSM option valuation formula except that the BSM formula is based upon the option being exercisable only at expiry. The assumption is that early exercise is not permitted. In other words, BSM applies to European options and not American options. Therefore Choice 'd' represents the correct answer as it is not an assumption underlying Black Scholes.
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