Sign Up Now
Get instant access to over 1 million+ study documents
OR
Already registered? click here to login
By creating your account, you agree to our terms of service, privacy policy and student honor code.
¶ … Pricing
The price of Google today is $520.00 (MSN Moneycentral, 2014). The assumption then is that the strike price is going to be $572. The price of an option is related to the strike price, the price of the stock, the time to expiry, and the volatility of the stock and the risk free rate, according to the Black-Scholes option pricing model (Folger, 2014). The case notes that the option is a call, but does not say anything about expiry. So it is assumed that the option expires in 90 days. The risk free rate, based on the 1 year Treasury, is 0.078%.
The challenge in implementing Black-Scholes is to figure out the implied volatility. There doesn't appear to be a great source for this, but online it seems to be in the 17-18% range for Google, so 17% will be used. The Black-Scholes calculator is used: http://www.mystockoptions.com/black-scholes.cfm
The value of this call option is $3.061, using this formula. A 60-day call with a strike price of $575 currently has a bid-ask of $3.60 - $4.00, so the current...
If anything, the Black-Scholes calculation is a little bit low, because the 90-day option is further out than the 60 day that exists on the market. If the implied volatility has increased, for example to 20%, then the Black-Scholes gives us a price of this call of $4.978. It appears, from this analysis, that the call is slightly overpriced in the market, which might mean that Google's implied volatility has increased. Still, it is believed that this option is overpriced, given where Google's volatility appears to be at present.
The futures contract in June 2014 for crude oil is $101.50. A year ago, the one-month futures contract for crude oil was $91.95.
If I had invested $1,000 in that futures contract a year ago, it would be worth $1,103.86., which implies a gain of $103.86.
I would speculate that this will be worth more in the next year. That is mostly based on the expected change in the price of oil. The global economy is growing at present,…
References
Folger, J. (2014). Options pricing: Black-Scholes model. Investopedia. Retrieved May 15, 2014 from http://www.investopedia.com/university/options-pricing/black-scholes-model.asp
MSN Moneycentral. (2014). Google. Retrieved May 15, 2014 from http://investing.money.msn.com/investments/stock-price?symbol=GOOG&ocid=qbeb
Trading Charts.com (2014). Light crude. Trading Charts. Retrieved May 15, 2014 from futures.tradingcharts.com/marketquotes/CL_.html
Black-Scholes Option Pricing Model was developed in the 1970s as a way to generate a legitimate and accurate valuation model for stock prices based on specific circumstances in the market and the stock options. It is the creation of economists Myron Scholes and Fischer Black who aimed to better forecast call options at various times within the option life cycle (PBS, 2000). According to the research, "this work involved calculating
Black-Scholes model is essentially a formula used in the calculation of a theoretical call price for options. It is considered to be the fundamental model for pricing in the option market (Cretien, 2006). This model uses in its calculation the five main determinants of an option's price, which include stock price, strike price, volatility, time left until expiration, as well as risk-free, short-term interest rate (Hoadley, 2010). The computations executed
Price Call Models Black-Scholes Model and the Binomial Model are some of the widely used price call options. Despite the fact that these two models share the same theoretical foundation and assumptions like the Brownian motion theory and risk neutral valuation, they happen to have some notable differences (Rendleman & Bartter, 1979). The Black-Scholes model is basically used to calculate a theoretical call price. This call price ignores dividends paid during the
Black-Scholes and Binomial Models There are different variables that usually impact the pricing options. This paper will be based on the attributes of the two widely accepted models that are used for pricing options; Black-Scholes and the Binomial Models. These two models are based on the same theoretical assumptions and foundations like risk neutral valuation and geometric price Brownian motion theory of stock price behavior. Option pricing theory has become among the
Black-Scholes and Binomial Models The variables that impact the pricing of options consist of the following basic factors: the underlying stock price, the strike price of the option, the time until expiration of the option, volatility, interest rates, and dividends (Folger, 2015). However, how these factors are perceived differs according to the model used to gauge the value of the option. The Black-Scholes model and the binomial model differ in their
Financial Management Required: I Net Present Value (NPV) is a financial technique used in capital budgeting to evaluate the profitability of a project. To determine the viability of investment, it is critical to invest when NPV is positive or greater than zero. Organizations face option to move forward with the investment or to abandon an investment. When an NPV is greater than zero, the investment should be accepted. The decision tree