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Ch. 22 OPTION VALUATION I. Black-Scholes Option Pricing Model

Ch. 22 OPTION VALUATION I. Black-Scholes Option Pricing Model C 0 = S 0 N(d 1 ) - Xe -rt N(d 2 ) where d 1 = [ln (S 0 /X) + (R F + s 2 /2)T] / s T .5 = hedge ratio d 2 = d 1 - s T .5 and ln = natural logarithm function e = 2.71828, the base of the natural logarithm

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Ch. 22 OPTION VALUATION I. Black-Scholes Option Pricing Model

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  1. Ch. 22 • OPTION VALUATION • I. Black-Scholes Option Pricing Model • C0 = S0N(d1) - Xe-rtN(d2) • where • d1 = [ln(S0/X) + (RF + s2/2)T] / sT.5 = hedge ratio • d2 = d1 - sT.5 • and • ln = natural logarithm function • e = 2.71828, the base of the natural logarithm • N = cumulative standard normal distribution • II. Option sensitivity to valuation factors • CALL PUT • Stock price (S) + - • Time to expiration (T) + + • Exercise price (X) - + • Volatility (s) + + • Risk-free rate + - • Dividends (D) - +

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