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Black and Scholes Model - Assignment Example

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In the paper “Black and Scholes Model” the author explains the reason why the Black and Scholes framework is not the appropriate framework to accommodate the main characteristics of the Energy Markets. The model developed by Black and Scholes refers mostly to the financial option. …
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Black and Scholes Model
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Download file to see previous pages For this reason, it has been supported by Leslie (1997, 4) that “many discussions in the literature get bogged down in the mathematics of Black Scholes valuation when they go beyond the conceptual level; however managers dont need to be deeply conversant with the calculation techniques of real-option valuation”. The particular model can be found in the Appendix section. It should be noticed in any case the Black-Scholes model has originally developed for the pricing of options. However, its potential use in different sectors at the next stage cannot be rejected. As for the potential use of the specific model in the energy sector, this could be considered as rather difficult to be completed mostly because this model would fail to represent the particular characteristics of this sector. More specifically, the use of this model is thought to be related to a series of assumptions the most characteristic of which are the following ones: a) the stock pays no dividend during the option’s life [2]. In the case of energy markets, such a condition could not be applied. The profits in the energy sector – which is a highly risky one – are usually ‘distributed’ shortly after their acquaintance among the shareholders. The use of another strategy could be extremely negative for the company involved (which is depended highly on the contributions of its shareholders especially in cases of emergencies – extended environmental damages, and so on). In the energy sector, shareholders should be satisfied with their participation in the industry particularly if we consider that on many occasions they have to suffer severe losses due to unexpected turbulences related (directly or indirectly with the energy market), b) no commissions are charged. In the energy sector, it could be doubted if a transaction of oil. ...Download file to see next pagesRead More
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