Answer: Interest rates are known and constant.

B is correct. The Black-Scholes-Merton (BSM) model makes several key assumptions: 1. **Continuous price movements**: The underlying asset price follows a geometric Brownian motion with continuous paths 2. **Constant interest rates**: The risk-free interest rate is known and constant 3. **Constant volatility**: The volatility of returns is constant 4. **No dividends**: The underlying pays no dividends during the option's life 5. **No transaction costs**: Perfect liquidity and frictionless markets 6. **European-style exercise**: Options can only be exercised at expiration 7. **Log-normal distribution**: Returns are log-normally distributed All options A, C, and D are actually correct assumptions of the BSM model, but the question appears to be asking for which one is specifically correct, and the answer provided in the text is B.

Author: LeetQuiz Editorial Team