Black-Scholes world
From WilmottWiki
The Black-Scholes world is a set of assumptions. Under these assumptions options can be priced using the Black-Scholes equation.
The assumptions are as follows.
- The underlying asset follows a lognormal random walk
- The risk-free interest rate is a known function of time
- There are no dividends on the underlying asset
- Delta hedging may be done continuously
- There are no transaction costs on the underlying
- There are no arbitrage opportunities
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References
- Black, F & Scholes, M 1973 The pricing of options and corporate liabilities. Journal of Political Economy 81 637-59
