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Full-Text Articles in Physical Sciences and Mathematics
Intuitive Black-Scholes Option Pricing With A Simple Table, Tom Arnold, Terry D. Nixon, Richard L. Shockley Jr.
Intuitive Black-Scholes Option Pricing With A Simple Table, Tom Arnold, Terry D. Nixon, Richard L. Shockley Jr.
Finance Faculty Publications
The Black-Scholes option pricing model (1973) can be intimidating for the novice. By rearranging and combining some of the variables, one can reduce the number of parameters in the valuation problem from five to two: 1) the option's moneyness ratio and 2) its time-adjusted volatility. This allows the computationally complex Black-Scholes formula to be collapsed into an easy-to-use table similar to those in some popular textbooks. The tabular approach provides an excellent tool for building intuition about the comparative statics in the Black-Scholes equation. Further, the pricing table can be used to price options on dividend-paying stocks, commodities, foreign exchange …
Visualizing The Stochastic Calculus Of Option Pricing With Excel And Vba, Tom Arnold, Stephen C. Henry
Visualizing The Stochastic Calculus Of Option Pricing With Excel And Vba, Tom Arnold, Stephen C. Henry
Finance Faculty Publications
Stochastic calculus, part calculus and part statistics, is an integral part of option pricing that can be intimidating. By developing the statistical nature of stochastic processes and introducing Monte Carlo simulation using Microsoft Excel, this paper develops a visualization of how stochastic processes are evaluated using Ito's lemma and integral calculus. Ultimately, the Black-Scholes (1973) option pricing equation is the natural result.