Application of BS Model

The solution of BS formula requires five variables. Out of these 5 variables, the four variables, namely, E, R, T and S are easily observable/known to market participants. The only unknown variable is the standard deviation of the share price, its value can be determined by referring to weekly observations of the share prices in the immediate preceding year; this value of standard deviation can, then, he used as a surrogate in the BS formula.

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