Black-Scholes Assumptions
Assumptions of the Black-Scholes Option Pricing Model
No riskless arbitrage opportunity exists.
There are zero transaction costs .
There are no restrictions to short selling of the underlying security.
You can buy or sell any quantity of the underlying security, even a fraction (e.g. 0.1843 shares).
You can borrow or lend cash , in any quantity, at a constant risk-free interest rate (this risk-free interest rate is one of the parameters entering the calculation of option prices).
Future direction of the price of the underlying security canâ€™t be predicted. The price makes a “random walk” . This also means that:
Returns are normally distributed.
Prices are log-normally distributed.

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