4. Derivative Pricing

Black Scholes — Quiz

Test your understanding of black scholes with 5 practice questions.

Practice Questions

Question 1

The Black-Scholes model is derived using Itô's Lemma and a replicating argument. What type of options is this formula primarily used to price?

Question 2

In the Black-Scholes model, the underlying asset's price is assumed to follow a lognormal distribution. Which of the following statements accurately describes a characteristic of a lognormal distribution in this context?

Question 3

Which of the following 'Greeks' measures the rate of change of an option's Delta with respect to the underlying asset's price?

Question 4

The Black-Scholes model assumes continuous trading. What does this assumption imply about the ability to adjust a portfolio?

Question 5

Consider a European call option with a strike price of $$50$$ and a current stock price of $$50$$. If the time to expiration is short and volatility is low, what would be the approximate Delta ($\Delta$) of this option?