FoundationMultiple choice
When the model meets the market · Part 1 of 3
A desk prices one-year options on an equity index with Black–Scholes at a single volatility of 20%. The market prices the at-the-money option at 20% implied volatility but the 80-strike put at 28%.
Which Black–Scholes assumption do these market prices contradict most directly?
- AThat volatility is constant
- BThat the risk-free rate is known and constant over the life of the option
- CThat the index pays no dividends
- DThat options can only be exercised at expiry, since index options are European by construction
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