Financial Derivative
Report: 1
Black Scholes method is a very famous method for the valuation of an equity share and other variables related to the value of an equity share in the future months. As stockbrokers, we make certain recommendations but never state that we shall compensate clients for investments made on the basis of our recommendations. The clients have to take their own decisions regarding investment along with the concerned risks, and if we try to proceed in any other manner, then it will be a violation of our rules for being a stock broker. Now let us try to understand how the famous valuation method of Black Scholes operates. (FAS 123(R): Lattice vs. Black-Scholes)
The method used is a differential equation which has the basic assumptions seeded in it. Let us again not go into mathematical details, but once the key characteristics are plugged into the Black Scholes formula, the price and price volatility of the underlying stock, coupled with the available rate of return on a risk free stock the formula devised by Black Scholes provides the value for an option. The original Black Scholes formula and others derived on them have been used for many years by investors dealing in options which are traded on the exchange. The general view that is taken of the options produced by these formulae is considered to be theoretically and empirically sound. (FAS 123(R): Lattice vs. Black-Scholes)
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