What aspect of the time value of money does the factor of e represent in the Black-Scholes option value formula?
A) annual compounding
B) compounding at the expiration time frame
C) continuous compounding
D) daily compounding

Question

Quizplus · Accepted Answer

The factor of e in the Black-Scholes option value formula represents continuous compounding, which assumes that the interest is compounded at an infinite number of intervals, resulting in a smoother growth curve. This assumption is necessary to model the behavior of stock prices, which are known to follow a geometric Brownian motion.

What Aspect of the Time Value of Money Does the Factor