金融工程英文课件：Chapter 5 The Black-Scholes Model.pptVIP

Chapter 5 The Black-Scholes Model The relationship between Binomial Model and the Black-Scholes Model The former is discrete time models and the latter is continuous time models The Black-Scholes Model is the limit of the Binomial Model Assumptions Stock prices behave randomly and evolve according to a lognormal distribution The risk-free rate and volatility of the log return on the stock are constant throuthout the option’s life There are no taxes or transaction costs The stock pays no dividends The options are European Assumption 1Prices behave randomly In the long run, we can recognize the trend of price movement In short time, we are not so sure of the price movement. Stock returns are lognormally distributed Assumption 2 Risk –free rate is constant Volatility of logreturn on the stock is constant Assumption 3 No transaction costs No taxes Assumption 4 Stock pays no dividends Assumption 5 The options are European Formula Example S=125.9375 X=125 r=0.4466 T=0.0959 σ=0.83 C=? Interpretation of the formula Risk averse investors determine the prices of the primary assets in the financial markets while the forces of arbitrage determine the prices of derivatives. So we can price an option as if investors were risk neutral. The lower bound of a European call The formula when T=0 The formula when S=0 We get C=0 The formula when σ=0 The formula when X=0 The call is equivalent to the stock Delta The delta is the change in the call price for very small change in the stock price. Delta also changes as the option evolves through its life. Delta hedge and Delta neutral 130 Gamma The gamma is the change in the delta for a very small change in the stock price. The exercise price The risk-free rate The call price is nearly linear in the risk-free rate and does not change much over a very broad range of risk-free rates. The volatility or stand deviation The sensitivity of a call price to a very small change in volatility is called its vega. The time to expirat