(2 points) Constant volatility (o) is not a necessary condition for the Black-Scholes option pricing...
90.2K
Verified Solution
Link Copied!
Question
Finance
(2 points) Constant volatility (o) is not a necessary condition for the Black-Scholes option pricing formulas to work. When o (t) is a non-random function of time, we can use the average volatility in the computation of d1 and d2 to implement the pricing formulas. However, when stochastic volatility is present as characterized in a GARCH or Heston model, the Black-Scholes formulas no longer work; but we can apply Monte Carlo or binomial models to compute option prices. O TRUE O FALSE (2 points) Constant volatility (o) is not a necessary condition for the Black-Scholes option pricing formulas to work. When o (t) is a non-random function of time, we can use the average volatility in the computation of d1 and d2 to implement the pricing formulas. However, when stochastic volatility is present as characterized in a GARCH or Heston model, the Black-Scholes formulas no longer work; but we can apply Monte Carlo or binomial models to compute option prices. O TRUE O FALSE
Answer & Explanation
Solved by verified expert
Get Answers to Unlimited Questions
Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!
Membership Benefits:
Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
