4 - Black-Scholes Option Pricing Model Flashcards Preview

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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

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