Flashcards in 4 - Black-Scholes Option Pricing Model Deck (13):
what does weak form market efficiency mean?
historical info can't help you predict future prices
the binomial model has discrete time and discrete variables, what does the black scholes model have?
continuous time and continuous variable
what number of days per year should you use as the denominator when calculating stock prices? for black schoels?
260 - stock prices don't change when stock markets are closed
options and stock prices depend on what?
the same underlying source of uncertainty
what is achieved by forming a portfolio of stocks and options that eliminate source of uncertainty?
portfolio is riskless and earns risk free r§ate of return
what are the seven assumptions that the black schoels model makes?
-stock prices follow log normal distribution
-interest and volatility are constant
-no tax/transaction costs
-risk neutral pricing
what does N(d1) and N(d2) stand for?
cumulative normal probability
what does the sigma symbol stand for?
annualised standard deviation, volatility
what happens to call value when stock price increase in BS model?
call value increase as d1 and d2 approach 1
what happens to call value when stock price decreases in BS model?
call value decreases as d1 and d2 approach o
what does S x N(d1) tell you?
the expected value of the stock received, because its a positive number
what does - Xe^(-r x T) x N(d1) tell you?
the expected value of exercise price paid, because it's a negative number