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OPTION VALUATION

INTRODUCTION

We should keep our options open is the phrase preferred in our day-to-day life. The reason is option brings privileged position to its holder by providing him discretion to use it if he so desires. In finance, an option entitles its holder to buy or sell an asset at a specified (predetermined fixed) price on or before a specified date. Although the concept is generic option is more commonly used in the context of corporate securities. This Chapter, therefore focuses on stock share options only. Section 1 describes the concept of option and its types. Option payoffs and option boundaries have been explained in Sections 2 and 3 respectively. The factors influencing its valuations are explained in Section 4. The Black-Scholes model of option valuation has been described in Section 5. The summary of the main points is provided in Section 6.

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