Explanation of Black-Scholes Option Valuation Equation

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The main equation for the Black-Scholes Option Valuation is as follows: C = S.N(d1. - X.e-RT. N(d2. (12) where: C is the value of call option S is the current market price of shares in question X is the future exercise price R is the risk free interest rate per annum T is the time to expiry (in years) e is the mathematical constant 2.718, used to calculate value on a continuous compounding basis. (X.eRT is the future value or amount, at time T, of a sum of money X invested @ R% on continuous compounding basis. If compounded annually, the amount at R% compound rate of interest at time T is X(1 + r/100)T, which is roughly equal to X.eRT) N(d1) and N(d2) represent the cumulative area under the normal distribution curve for a 'z'* value of d1 and d2 where d1 = log(S / X) RT V.T + +. V.T d2= d1– V.T And log (SIX) is the natural log (to the base 'e') of SIX. *'z' is the standard normal variable (observation value) in a normal distribution with a mean (μ) = 0, and a stand (...) Read more? Sign up for free

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