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Corporate Finance
As explained by Professor Watkins at San Jose State University, the binomial option pricing model is when a stock price over some period is presumed to go up by a certain percent or down by a certain percent. This leads to a formula whereby the current stock price is multiplied times one plus the percentage it could go down and then the same formula is done for the percentage it could go up. If a call option is in play or if the stock has interest that is risk-free, then the formula gets a little more complex (Watkins, 2014). Risk-neutral option pricing relies on something known as arbitrage. In this instance, all future outcomes are adjusted for risk and the expected asset values that...
Once that is done, every asset can be priced accordingly. This is not the same thing as true real-world risk but it is commonly and pervasively used throughout the option pricing sphere. The key part about this method and arbitrage is that there is assumed to be none, with arbitrage the intentional act of purchasing and selling an option for a quick buck. It is extremely hard to pull off but people attempt it all of the time (Investopedia, 2014).
Investopedia. (2014, July 31). Investopedia - Educating the world about finance. Investopedia.
Retrieved July 31, 2014, from http://www.investopedia.com/
Watkins, T. (2014, July 31). The Binomial…
As with other parts of doing business and the wants of all the stakeholders and investors involved, the agency problem is when the differing objectives and desired outcomes of the stakeholders and investors lead to business decisions that fail to properly and sufficiently maximize value. Not unlike situations where money is tugged between dividend payments and more investing in the business, an agency problem creates issues with mergers as the price a business is sold or bought for has a major effect on the motives and perspectives of the people involved. One academic theory that relates to this subject points out that perceived or stated value up front before a merger is approved and executed can differ greatly from the verifiable or perceived value found after the fact. Further, it is shown that managerial behavior by bidding companies is promoting of mergers that are excessive and managerial behavior in target firms tends to manifest in the opposite way. In short, the collusion and behavior of buying and selling firms leads to an improper price being paid for a firm and this can be either a boon or a bust for the buying firm (Caves, 1989).
Caves, R. (1989). Mergers, takeovers, and economic efficiency: Foresight vs. hindsight.
International Journal of Industrial Organization, 7(1), 151-174.
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
employee stock option pricing is effected by the bonus plan hypotheses as discussed in the Watts and Zimmerman article. Employee stock option pricing is an option on the common stock of a company that is issued as a form of non-cash compensation. Restrictions on the option (as for instance vesting and limited transferability) are ways in which the business attempts to align its own interests with those of the holder's
Financial Analysis Introduction ( a ) A real option is just that -- the option to do something, if a particular situation arises. The principle is the same as for a financial option. The difference is that real options pertain to physical things -- usually pieces of equipment, real estate or other such assets (Investopedia, 2015). An example of a real option would be when you sign a lease on a piece
deviations from purchasing power parity for countries' competitive positions in the world markets? Per a Wisconsin University study, there are two major effects. The first is a "real barriers" effect and the other is a sticky-consumer-price issue. The first of those two can cause deadweight welfare losses. However, that could be counteracted by fixed exchange rates. However, this can be flummoxed by a lack of pass-through along the entire market
Valuation Project Option Valuation Value two call options, using two different option-pricing calculators, and/or pricing programs. The two calls you are to value are: Ticket Symbol (WFM) The August 2014 $50.00 Whole Foods Call Option (50 is the Strike Price) The January 2015 $50.00 Whole Foods Call Option (50 is the Strike Price) The two models that were utilized are the Binomial and Black Scholes. The Binomial model is focused on looking at 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