Explanation of Black-Scholes Option Valuation Equation LAKSHMAN PURIHELLA, Accountant, Saudi Arabia, Member The main equation for the Black-Scholes Option Valuation is as follows:
C = S.N(d1. - X.e-RT. N(d2. (12)
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
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... Read more? Sign up for free
Read all responses and join this discussion yourself. Support your career and personal development with 12manage, the management platform.