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SUMMARY

SUMMARY > Options are a special type of financial contracts under which the buyers of the options have the right to buy or sell the shares/stocks hut do not haw obligation to do so. > Essentially, options are of two types: call and put. A call option gives the...

Application of BS Model

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,...

Assumptions

Assumptions The BS model is based on the following assumptions (1) It considers only those options which can be exercised at their maturity that is, European options. (2) The market is efficient and there are no transaction costs and taxes. Options and shares...

The BS Formula

The BS Formula Pricing of an option requires building a portfolio in shares and a loan in such a manner that its payoffs are equivalent to the payoffs from the option. We also know that there are five factors which influence the value of option: current share price,...

THE BLACK-SCHOLES OPTION PRICING MODEL (Table)

TABLE Payoffs With Purchase of 2/3 Share With Borrowings THE BLACK-SCHOLES OPTION PRICING MODEL Since both alternatives yield identical payoffs. both investments today must have the same value to avoid arbitrage (explained earlier). C  = Value of 2/3 of a share -...

THE BLACK-SCHOLES OPTION PRICING MODEL

THE BLACK-SCHOLES OPTION PRICING MODEL Black and Scholes (BS) developed a precise model to arrive at the equilibrium value, of an option. Before the BS mood is discussed in detail. it will be useful to understand the concept of option equivalent. The concept involves...