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Lecture_16_student0 - Lecture 16: Options and Corporate...

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Lecture 16: Options and Corporate Finance: II
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Topics Option Pricing: Black-Scholes Formula Application: Equity Value as Option
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Black-Scholes Model The binomial approach provide good intuition but they do not work effectively in the real world. There are many more than two possibilities for future stock prices. Black and Scholes Model Nobel-Price winning theory developed by Fisher Black and Myron Scholes. Based on replicating portfolio that duplicates a call over an infinitesimal horizon. Major tool used by the finance industry to price options
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Black-Scholes Model 4 ) N( ) N( 2 1 0 d Ee d S C rT × - × = - Where C 0 = the value of a European option at time t = 0 r = the risk-free interest rate. T=the maturity of option T T σ r E S d σ ) 2 ( ) / ln( 2 1 + + = T d d - = 1 2 N( d ) = Probability that a standardized, normally distributed, random variable will be less than or equal to d . The Black-Scholes Model allows us to value options in the real world.
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Black-Scholes Model: Example Find the value of a six-month call option on
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Lecture_16_student0 - Lecture 16: Options and Corporate...

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