Black Scholes summary Black Scholes matches qualitatively and quantitatively

Black scholes summary black scholes matches

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Black-Scholes summaryBlack-Scholes matches qualitatively and quantitatively the following sensitivities we discussed previously:Black-Scholes takes these five inputs (?, 𝑋, 𝜎, ?, 𝑟) and tells you what they imply call and put option premia should beAlso tell you what current replicating portfolio Δ, BisCall PricePut PriceStock price (?)IncreasesDecreasesExercise price (𝑋)DecreasesIncreasesVolatility (𝜎)IncreasesIncreasesMaturity (?)IncreasesUsually IncreasesInterest rate (𝑟)IncreasesDecreases Finance 367 - Lecture 23 Option Valuation 18 Black-Scholes Option Valuation
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10 Finance 367 - Lecture 23 Option Valuation 19 Implied volatility In practice, we observe every ingredient in Black-Scholes formula except 𝜎 Can estimate 𝜎 using past returns, as in Data Exercise 1 Can also reverse the Black-Scholes formula: instead of using 𝜎 to find ? and ? , use ? and ? to solve for 𝜎 “Implied Volatility”, typically annualized ? and ? high relative to ? ⇒ high implied volatility ? and ? low relative to ? ⇒ low implied volatility Predicts future stock volatility very well TLSA implied volatility for 6-month ATM options: 72% GOOGL implied volatility for 6-month ATM options: 31% S&P implied volatility for 6-month ATM options: 27% Requires fancy Excel spreadsheet or other software (just Google “implied volatility calculator”) Available on Yahoo! Finance Implied volatility over time Gulf war LTCM 9/11 Iraq Lehman etc. US Debt Downgrade Covid-19
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1 Travis Johnson Finance 367 Lecture 24: Mutual Funds, Hedge Funds, Course Wrap-up Chapter 4 Announcements Final Exam on Friday, May 15 th Covers entire course, with a focus on the last Unity 15-20 questions on last unit, 15-20 questions on first three units Your choice of 9am-noon or 2-5pm No need to tell use in advance which one you’ll chose Same rules as Midterm 3: Open notes, textbook, internet etc. You definitely still need to study! Must be on Zoom call with us, video enabled if possible No discussing with anyone else inside or outside class Main Concepts in Unit 4: forward and futures terminology, hedging & speculating using futures, futures arbitrage pricing, futures curve, put and call option terminology & payoffs, payoffs vs net payoffs, hedging & speculating using options, option strategies, put-call parity (& arbitrage), intrinsic vs time value, general option valuation properties, binomial options pricing (& arbitrage), implied volatility, mutual funds, hedge funds Finance 367 - Lecture 24 Mutual Funds, Hedge Funds, Wrap-up 2
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2 Pre-exam schedule Pre-exam schedule: TA Review Session: Thursday, May 14th TA office hours Jangwoo Lee Thursday 5/7 5-6pm Thomas Lee Monday 5/11 5-6pm Changyong Song 5/13 3-4pm My office hours (Tuesday 5/12 4-6pm) Finance 367 - Lecture 24 Mutual Funds, Hedge Funds, Wrap-up 3 Mutual fund idea Investors pool their money, have manager invest it Cheap way to get diversification Less effort than managing your own assets Save on transaction costs Professional money manager may do a better job than you would?
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