Answered: In 1973, Fischer Black and Myron…

In 1973, Fischer Black and Myron Scholes developed the Black-Scholes option pricing model(OPM).(1) What assumptions underlie the OPM?

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter8: Financial Options And Applications In Corporate Finance

Section: Chapter Questions

Problem 3P

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In 1973, Fischer Black and Myron Scholes developed the Black-Scholes option pricing model
(OPM).
(1) What assumptions underlie the OPM?

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In 1973, Fischer Black and Myron Scholes developed the Black-Scholes option pricing model (OPM). (1) What assumptions underlie the OPM? (2) Write out the three equations that constitute the model. (3) According to the OPM, what is the value of a call option with the following characteristics? Stock price = 27.00 Strike price = 25.00 Time to expiration = 6 months = 0.5 years Risk-free rate = 6.0% Stock return standard deviation = 0.49
What are the Black-Scholes Options Pricing Model's underlying assumptions?
Explain in detail with an example how the change of the variables (like Stock Price, Exercise Price, Risk-Free Rate, Volatility or Standard Deviation, and Time to Expiration) of Black-Scholes-Merton Formula affect the price of the option.
Michael Weber, CFA, is analyzing several aspects of option valuation, including the determinants of the value of an option, the characteristics of various models used to value options, and the potential for divergence of calculated option values from observed market prices.a. What is the expected effect on the value of a call option on common stock if the volatility of the underlying stock price decreases? If the time to expiration of the option increases?b. Using the Black-Scholes option-pricing model and an estimate of stock return volatility, Weber calculates the price of a 3-month call option and notices the option’s calculated value is different from its market price. With respect to Weber’s use of the Black-Scholes option-pricing model,i. Discuss why the calculated value of an out-of-the-money European option may differ from its market price.ii. Discuss why the calculated value of an American option may differ from its market price.
What is the purpose of the Black–Scholes Option Pricing Model?
In the Black-Scholes option pricing model, the value of a call is inversely related to: a. the risk-free interest stock b. the volatility of the stock c. its time to expiration date d. its stock price e. its strike price
After describing the main hypothesis made in the black and Scholes model explain the reasons why the volatility smile (or skew) is showing up in the options markets? Describe three alternative models to the Black and Scholes model (except the sticky delta and the sticky strike methods) and explain/justify how they cope with the phenomenon of volatility skew.
Compare the binomial and Black-Scholes option pricing models. What are their differences and similarities? In what circumstances would you prefer one versus the other? Use real market data as well as academic references.
Assume that you have been given the following information on Purcell Corporations call options: According to the Black-Scholes option pricing model, what is the options value?
Black-Scholes Model Assume that you have been given the following information on Purcell Industries call options: According to the Black-Scholes option pricing model, what is the option’s value?
We showed in the text that the value of a call option increases with the volatility of the stock. Is this also true of put option values? Use the put-call parity theorem as well as a numerical example to prove your answer.
Discuss the history of evolution of interest rate option pricing models that started from the BSM model and ended with the HJM libor model.