- It is possible to borrow and lend cash at a known constant risk-free interest rate.
- The stock price follows a geometric Brownian motion with constant drift and
*constant volatility*and they are lognormally distributed. - There are no transaction costs.
- The stock does not pay a dividend (this was modified by Merton later on).
- All securities are perfectly divisible (i.e. it is possible to buy any fraction of a share).
- There are no restrictions on short selling.
- Markets are efficient.

## March 16, 2009

### Black Scholes Assumptions

The Black-Scholes model of the market for an equity makes the following explicit assumptions:

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