Key assumptions BS model

Black Scholes model
What are the key assumptions of the Black Scholes model?

Hint

Take a look at the lesson on ‘The Black Scholes Model and Implied Volatility’.

Answer

The derived BS model assumes that
  • The financial instruments have lognormal distributed prices.
  • The underlying asset has no dividend payments.
  • There is a constant risk-free rate.
  • The asset is traded continuously over time.
  • The asset is traded in a perfect market, in which there are no taxes and no transactions costs.
  • Another very important assumption is that the BS model uses a constant volatility, which is a very important assumption and important to understand. This volatility is called the implied volatility.