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Introduction to the Black-Scholes formula (BSM)
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Black-Scholes option pricing model (its Merton’s extension that accounts for dividends), there are six parameters which affect option prices:
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So = underlying price ($$$ per share)
X = strike price ($$$ per share)
σ = volatility (% p.a.)
r = continuously compounded risk-free interest rate (% p.a.)
q = continuously compounded dividend yield (% p.a.)
t = time to expiration (% of year)
Value of call option = So * ND1 - K *e^-rt * ND2
Value of put option = K * e^-rt* ND2 - So* ND1
Calculation of ND1 & ND2 in case of call option
D1 = [ ln(So/K) + (r + ∂ ^ 2 / 2) * t ] / [ ∂ * sqrt (t) ]
D2 = [ ln(So/K) + (r - ∂ ^ 2 / 2) * t ] / [ ∂ * sqrt (t) ]
Normal Distribution formal in spreadsheet = normsdist(d1), normsdist(d2)
For put option use "-" in normsdist(-d1) or normsdist(-d2)
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Do like ,share ,comment && Subscribe for more such videos!!!
So = underlying price ($$$ per share)
X = strike price ($$$ per share)
σ = volatility (% p.a.)
r = continuously compounded risk-free interest rate (% p.a.)
q = continuously compounded dividend yield (% p.a.)
t = time to expiration (% of year)
Value of call option = So * ND1 - K *e^-rt * ND2
Value of put option = K * e^-rt* ND2 - So* ND1
Calculation of ND1 & ND2 in case of call option
D1 = [ ln(So/K) + (r + ∂ ^ 2 / 2) * t ] / [ ∂ * sqrt (t) ]
D2 = [ ln(So/K) + (r - ∂ ^ 2 / 2) * t ] / [ ∂ * sqrt (t) ]
Normal Distribution formal in spreadsheet = normsdist(d1), normsdist(d2)
For put option use "-" in normsdist(-d1) or normsdist(-d2)
#conceptbuilders #Nirajbotadra #Valuation
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