One of the assumptions in Black-Scholes Option Pricing Model is that underlying asset prices are:

The correct answer is Log-normally distributed.

Key Points

• Actually, one of the assumptions in the Black-Scholes Option Pricing Model is that the underlying asset prices follow a geometric Brownian motion, which implies that the logarithm of the prices follows a normal distribution. This assumption is commonly referred to as the log-normal distribution assumption.
• The log-normal distribution assumption is a key assumption in the Black-Scholes model because it allows for the modeling of the continuous compounding of asset returns over time. It assumes that the underlying asset's returns are normally distributed, meaning that they have a symmetric bell-shaped distribution when plotted on a logarithmic scale.
• This assumption is often justified by empirical observations in financial markets, where many asset prices exhibit log-normal behavior over certain timeframes. However, it's important to note that the assumption of log-normality may not hold perfectly in all cases, especially during periods of extreme market events or when dealing with certain types of assets.

Hence, the correct answer is Log-normally distributed.