Put your understanding of the Black-Scholes model to the ultimate test with this challenging quiz. Discover how many questions you can answer correctly out of 15!
1. What is the main purpose of the Black-Scholes model?
To predict future stock prices
To price European-style options
To calculate bond yields
To forecast economic growth
2. Which of the following is NOT an input for the Black-Scholes equation?
Volatility
Market liquidity
Price of the underlying asset
Time until expiration
3. What type of option does the Black-Scholes model specifically price?
American-style options
Binary options
European-style options
Asian options
4. The Black-Scholes model assumes that the underlying asset prices follow which type of distribution?
Normal distribution
Lognormal distribution
Poisson distribution
Uniform distribution
5. What is the cumulative standard normal distribution used to account for in the Black-Scholes equation?
Market liquidity risk
Strike price variability
Probability of future price movements
Transaction costs
6. Which of the following is a key assumption in the Black-Scholes model?
Options can be exercised at any time
Markets have constant drift and volatility
Dividends are regularly paid out during the life of the option
Options show a uniform volatility surface
7. In the context of the Black-Scholes model, what is meant by 'risk-free interest rate'?
The interest rate on high-risk bonds
The interest rate adjusted for inflation
The theoretical rate of return on a riskless investment
The market interest rate
8. The Black-Scholes model predicts that the price of heavily traded assets follows what type of motion?
Brownian motion
Random walk
Geometric Brownian motion
Oscillatory motion
9. What primary factor affects the theoretical value of an option according to the Black-Scholes model?
Historical price of the asset
Liquidity of the asset
Implied volatility
Trading volume
10. Which limitation is associated with the Black-Scholes model?
It accurately prices American options
It assumes a flat volatility surface
It incorporates high-frequency trading effects
It takes transaction costs into account
11. Which parameter in the Black-Scholes model is NOT unequivocally observable?
Time to maturity
Strike price
Risk-free interest rate
Volatility
12. How do market makers adjust the Black-Scholes model to account for volatility skew?
Incorporating a variable standard deviation based on strike price
Using a fixed standard deviation
Adjusting time to maturity
Ignoring skewness altogether
13. Which is NOT an assumption made by the Black-Scholes model?
The option can be exercised anytime before expiration
Market movements are random
There are no transaction costs
The risk-free rate is constant
14. The Black-Scholes model calculates the price of an option by considering the stock price and:
Interest rate volatility
Current stock dividends
Cumulative standard normal probability distribution function
Corporate earnings reports
15. In practice, the implied volatility surface is often not flat. What shape does it typically take?
