Session 13’s discussion primarily centred around the topic of Real Options through the Citic Tower II

Case. We discussed how to price options using Black Scholes Model. Five variables are required by
the Black-Scholes equation. These factors include volatility, underlying asset price, option strike
price, remaining time before option expiration, and risk-free interest rate. Theoretically, option
sellers may set reasonable prices for the options they are selling using these variables. This
prompted me to ask the question – aren’t we assuming the volatility to be constant?

Sir replied that it is indeed true. The model makes the incorrect assumption that volatility stays
constant over the course of the option's life because volatility varies according to market conditions
including supply and demand. It is one of the limitations of the model.

This was my contribution to the discussion in the class.