Black and Scholes Model - Assignment Example

N-Cumulative Standard normal distribution function r- rate of return (risk free) T-time (up to expiry in years) S-current stock price o- volatility of stock q- strike price Broadie and Detemple (2000) in their evaluation suggested for a binomial model called Binomial Black and Scholes Model to price options.... hellip; The Black-scholes model and the binomial model are the most commonly used option pricing models.... The study mainly delimits itself to the two option pricing theories (Black-scholes model and binomial pricing option models)....

Among the many methods used to price options, we have the Black-Scholes option-valuation model (Ross, 2008), which employs intensive analysis in its... Date If options can only be priced because they can be replicated, why do we need them?... Introduction Pricing of options is conducted on myriads of instruments where the achievement of dynamic replicating is closer to impossible....

Fair value model, lattice model and finally minimum value method which is based upon the someone's willingness to purchase a call option on a share of stock at the current fair value of the stock with the right to postpone payment of the exercise until the end of the options period, ignoring the volatility of the underlying stock in valuation calculation.... The company had an option of either using Black-Schole option pricing model or the binomial option so as to come up with the options fair value....

A model simply means a representation.... But in all cases there must be a sender, encoding on the part of the sender, a message, a channel through which the message travels, a receiver, decoding on the part of the receiver and, in many situations, a feedback. The first scholar who attempted a communication model is Aristotle.... Later in 1949, Claude Shannon and Warren Weaver published a model that they called the "Mathematical model of Communication....

The models used most popularly are based on Black scholes model.... … According to the report the extended version of Black scholes model, uses the rate of interest to calculate the payoffs of the options, and this model is called popularly, the Black's Model.... This report discusses that Black's model is a mutation from the Black scholes model, which uses the rate of interest as the base for pricing the options.... When Black's model is used to value the price of European interest rate options, the worth of future price of V for a contract maturing at time T, is usually set equal to the forward price of V rather than its futures price....

In this case, the investor can use them even to protect his downside.... Options also enable one to employ considerable leverage.... The trader… Another advantage is the directional choice that is related to flexibility as the trader can use them to trade downward and upward and even sideways price movements (LearnMoney....

Black–Scholes Option Pricing model.... Black-scholes al Affiliation: Sensitivity Analysis In this question examine what happens to the price of the European call option when some of the parameters which enter the Black-scholes formula vary.... Give the Black-scholes formula for the price C0 of a European call option.... This amount is called “Delta” of the option: Using the Black-scholes formula, compute the Delta of a European call From the Black-scholes formula for a European call option today t=0 Time to maturity t = T Constant rate =(r ), Constant volatility=(σ) Strike price= K as: EQUATION 1 & C0 is the theoretical call value S is the current stock price N is the cumulative standard normal probability distribution DENOTED by ɸ herein after Rf is the risk free rate T-t is time to maturity X is the option strike price Determination of To begin with, we apply the chain rule we get The next step is to differentiate EQUATION 1 with respect to S to find EQUATION 2 It now becomes apparent that Therefore, we remain with the result Question Three 3....

Basically, the fundamental insight from the Black and Scholes Model comes out to be that the call option is always given a price value if the stock is to be traded (Wikipedia, 2005).... The paper entitled 'Foundation from the Black-scholes model' presents the financial world that is proving to be one of the most dynamic and innovative areas, directly competing with space technology in terms of rapid changes and scientific methods applied.... The Black-scholes model today is used in everyday pricing of options and futures and almost all formulas for pricing of exotic options such as barriers, compounds, and Asian options take their foundation from the Black-scholes model....