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21c - Chapter 21(Part 3 21(Part 3 Option Valuation Today...

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8/8/2011 1 Chapter 21 (Part 3 Chapter 21 (Part 3) Option Valuation Today: Chapter 21 (Part 3) – Black Scholes Wednesday:Chapter 22 – Futures Markets Options and Risk - 1 100 120 Stock Process 90 27 27 . Bond Process 30 110 606 . 10 0 Call Option (X = 110, T = 1) 165 0 16.5 Call Options
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8/8/2011 2 Options and Risk - 2 Replication (synthetic call): 1 call option = long $33.33 stock + short $27.27 bonds A call option can be viewed as a leverage position in the underlying asset. Options and Risk - 3 Pseudo-Beta? P i i C SS f f SS ww w w    33.33 27.27 5.5 4.5 6.06 Sf  CS S S w 
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8/8/2011 3 Black-Scholes Option Valuation The Formula: Where     00 1 2 rT CS N d X e N d      2 0 2 ln S X r T d  N(d) : The probability that a random draw from a standard normal distribution will be less than d . This equals the area under the normal curve up to d , as in the shaded area of Figure 21.6.
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21c - Chapter 21(Part 3 21(Part 3 Option Valuation Today...

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