同济大学金融衍生物定价理论课件 第五章.pptVIP

Chapter 5 European Option Pricing ------ Black-Scholes Formula Introduction In this chapter, we will describe the price movement of an underlying asset by a continuous model --- geometrical Brownian motion. we will set up a mathematical model for the option pricing (Black-Scholes PDE) and find the pricing formula (Black-Scholes formula). We will discuss how to manage risky assets using the Black-Scholes formula and hedging technique. History In 1900, Louis Bachelier published his doctoral thesis ``Thèorie de la Spèculation, - milestone of the modern financial theory. In his thesis, Bachelier made the first attempt to model the stock price movement as a random walk. Option pricing problem was also addressed in his thesis. History- In 1964, Paul Samuelson, a Nobel Economics Prize winner, modified Bacheliers model, using return instead of stock price in the original model. Let be the stock price, then is its return. The SDE proposed by P. Samuelson is: This correction eliminates the unrealistic negative value of stock price in the original model. History-- P. Samuelson studied the call option pricing problem (?. Sprenkle (1965) and J. Baness (1964) also studied it at the same time). The result is given in the following. (V,etc as before) History--- History---- The novelty of this formula is that it is independent of the risk preference of individual investors. It puts all investors in a risk-neutral world where the expected return equals the risk-free interest rate. The 1997 Nobel economics prize was awarded to M. Scholes and R. Merton (F. Black had died) for this brilliant formula and a series of contributions to the option pricing theory based on this formula. Basic Assumptions (a) The underlying asset price follows the geometrical Brownian motion: μ – expected return rate (constant) σ- volatility (constant) - standard Brownian motion Basic Assumptions - (b) Risk-free interest rate r is a constant (c) Underlying asset pays no divide