Week11Chapter11学习课件.pptVIP

FINA0301 DerivativesFaculty of Business and Economics University of Hong Kong Dr. Tao Lin Chapter Outline Introduction to the Black-Scholes formula for pricing European options Applying the formula to other underlying assets Options Greeks: the change in the option price when an input to the formula changes Delta-hedging: the means to hedge the risk of option positions Historical and implied volatility, trading volatility The Black-Scholes Formula The Black-Scholes option pricing model assumes that the terminal distribution of the stock price is described by a lognormal distribution That is, the logarithms of stock price follows a normal distribution The value of the call option at time to expiration is The Black-Scholes Formula Discounting the expected value of the option using the risk-free rate of interest gives the risk neutral pricing formula Call Options: where and Cumulative Normal Distribution Function N(x) in the Black-Scholes formula is the cumulative normal distribution function: the probability that a number randomly drawn from a standard normal distribution will be less than x. Extra Notes: There are several technical notes at the end, on the normal distribution and lognormality of assets prices for your reference. Not required. Example: Option Pricing Consider the European call option on the stock of XYZ we discussed in chapter 10. Current stock price S0 = $41 Strike Price K = $40 The volatility of the stock ? = 30% The continuously compounded risk-free interest rate r = 8% The option expires in one year T = 1 XYZ does not pay dividends δ = 0 Using Binomial Pricing Model Consider one year as one period, we found that the option price is $7.8391. (Refer to slides 10-25, 10-26, and 10-27.) Dividing one year into three periods, we found that the option price is $7.074. (Refer to slides 10-34, 10-35, and 10-36.) Using different number n of periods, we have Using Black-Scholes Formula Binomial Pricing Model and BS Formula The binomial