Explain 'Black-Scholes' assumptions.

Explain 'Black-Scholes' assumptions.

Approach: List the key requirements for the model to hold.

Assumptions include: constant volatility, risk-free rate is known and constant, no transaction costs, markets are continuous, no dividends, and underlying asset price follows a geometric Brownian motion.

Follow-up: Which assumption is most frequently violated in real markets? (Volatility)

Key concepts: constant volatility, no dividends, log-normal distribution.