Question

A stock price is currently $$\$ 20$$. Tomorrow, news is expected to be announced that will either increase the price by $$\$ 5$$ or decrease the price by $$\$ 5$$. What are the problems in using Black-Scholes-Merton to value 1-month options on the stock? 

   A stock price is currently $$\$ 20$$. Tomorrow, news is expected to be announced that will either increase the price by $$\$ 5$$ or decrease the price by $$\$ 5$$. What are the problems in using Black-Scholes-Merton to value 1-month options on the stock?
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Options, Futures, and Other Derivatives
Options, Futures, and Other Derivatives
John C. Hull 10th Edition
Chapter 20, Problem 8 ↓

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Assumption of Constant Volatility: The Black-Scholes-Merton model assumes that the volatility of the underlying stock price is constant over time. However, in this case, the stock price is expected to change significantly based on the news announcement. This  Show more…

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A stock price is currently $$\$ 20$$. Tomorrow, news is expected to be announced that will either increase the price by $$\$ 5$$ or decrease the price by $$\$ 5$$. What are the problems in using Black-Scholes-Merton to value 1-month options on the stock?
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