l1.11 The Assumptions Underlying Black-Scholes 1. The stock follows a Brownian motion with constant u and o 2. Short selling of securities with full use of proceeds is permitted 3. No transaction cost or taxes 4. Securities are perfectly divisible 5. No dividends paid during the life of the option 6. There are no arbitrage opportunities 7. Security trading is continuous 8. The risk-free rate of interest,r is constant and is the same for all maturities Options, Futures, and Other Derivatives, 4th edition@ 2000 by John C. Hull Tang Yincai, C 2003, Shanghai Normal University11.11 Options, Futures, and Other Derivatives, 4th edition © 2000 by John C. Hull Tang Yincai, © 2003, Shanghai Normal University The Assumptions Underlying Black-Scholes 1. The stock follows a Brownian motion with constant m and  2. Short selling of securities with full use of proceeds is permitted 3. No transaction cost or taxes 4. Securities are perfectly divisible 5. No dividends paid during the life of the option 6. There are no arbitrage opportunities 7. Security trading is continuous 8. The risk-free rate of interest, r, is constant and is the same for all maturities