Flashcards in 4 - Black-Scholes Option Pricing Model Deck (13):

1

## what does weak form market efficiency mean?

### historical info can't help you predict future prices

2

## the binomial model has discrete time and discrete variables, what does the black scholes model have?

### continuous time and continuous variable

3

## 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

365

4

## options and stock prices depend on what?

### the same underlying source of uncertainty

5

## 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

6

## 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

-no dividends

-EU options

-continuous time

-risk neutral pricing

7

## what does N(d1) and N(d2) stand for?

### cumulative normal probability

8

## what does the sigma symbol stand for?

### annualised standard deviation, volatility

9

## what happens to call value when stock price increase in BS model?

### call value increase as d1 and d2 approach 1

10

## what happens to call value when stock price decreases in BS model?

### call value decreases as d1 and d2 approach o

11

## what does S x N(d1) tell you?

### the expected value of the stock received, because its a positive number

12

## what does - Xe^(-r x T) x N(d1) tell you?

### the expected value of exercise price paid, because it's a negative number

13