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Black-Scholes Model with Binomial Comparison
Hello,
This is another template I made while studying. It calculates the value of a Put or Call Option using the Black-Scholes model and the Binomial model. This is more for comparative reasons than accuracy, as the Black-Scholes model is more accurate and versatile across time periods.
This template also displays the calculations along the way, again more for students to compare than accuracy.
This template should help you understand the Black-Scholes formula, and should not be a replacement for genuine study!!
This is another template I made while studying. It calculates the value of a Put or Call Option using the Black-Scholes model and the Binomial model. This is more for comparative reasons than accuracy, as the Black-Scholes model is more accurate and versatile across time periods.
This template also displays the calculations along the way, again more for students to compare than accuracy.
This template should help you understand the Black-Scholes formula, and should not be a replacement for genuine study!!
Views: 360
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Black-Scholes Model.xlsx, 11 KB
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Replies to This Discussion
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Permalink Reply by Simon Matthee on -
Also, here is the office 03 version for those of you with the old office.
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Black-Scholes Model.xls, 21 KB
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Permalink Reply by Deshbhushan Kumar Patil on -
Hi I seen your model it's good yaar & it's gives me inspiration develop model like that.
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Permalink Reply by Laura Bello on -
Thanks Simon. Seems very easy to use.
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Permalink Reply by Kareem Ayers on -
Great job/work & MANY THANKS!
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Permalink Reply by Jaspal Singh Kahlon on -
Thanks a lot for sharing
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Permalink Reply by farzana Rahman on -
WOW! its great! its gonna help all of us a lot. i know how much difficulty we faced when we worked with Black Scholes model last year. now, it's been easy! thank you for ur work.
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Permalink Reply by JC on
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Hi Simon,
Thanks for this. I'm currently studying a Kemna and Vorst model to apply in oil hedge valuations. Some of the variables are similar to the Black-Scholes model posted here. Can you please elaborate d1 and d2 and and how they relate to the formula?
Thanks in advance.
Sincerely,
JC
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Permalink Reply by Kojo A on
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Could you please help me understand how I can use the Black-Scholes Model in valuating a Mine Project?
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Permalink Reply by Kofi Koduah-Sarpong on -
If i understand you correctly i think you are looking at this from a real option perspective.
Black-Scholes is modeled as follows:
The hard fact is No BSM cannot be used to value such an investment. In most cases of real options the underlying is future revenues. These are usually not tradable. Often the holder of the real option is even the only company having that option (e.g. only the holder of the patent may commercialise the product). Therefore, the replication hypothesis of the Black-Scholes formula does not hold. In some industries like gold mining or oil drilling it is possible to build a replicating portfolio since gold and petrol have very liquid market. However, the Black-Scholes formula does not only require that you can hedge your option, it requires much more that you do hedge the option. It is not known that any company holds such a replicating portfolio.
As a consequence we cannot use the Black-Scholes formula. While the price of a financial option is the result of a trading strategy, the value of a real option is simply the discounted expected payoff of the business case. The above formula would become:
Value of a call-like real option. μ being the growth rate of the underlying S, r the discount rate.
In fact most business cases are more complex than just a simple call option analogy.
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Permalink Reply by Kofi Koduah-Sarpong on
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Thinking about it, you possibly could value an investment using Black-Scholes as opposed to real options. However the value would be way off the mark. You would have to start off with a simple mapping exercise, mapping the project characteristics into the Black-Scholes formula as below:
The key issue i for see during this exercise is that there will be confusion between what is and how we got there. That is:
- Accounting for risk aversion through the discount rate
- The issue of Magical Cancellation of risk aversion- Black, Merton & Scholes show with some interesting math that risk aversion is irrelevant to the value of an option.
If you think about it the Black-Scholes model is mathematically identical to a simple decision tree.
Again, before anything can happen let's understand the assumption of the Black-Scholes model:
The basic logic of the decision tree is straight to the point.
At the end of the day you would come to the following conclusion:
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Permalink Reply by Joseph McKenna on
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Can you explain what these inputs are.... d₁ d₂ N(d₁) N(d₂) ?? My model doesn't seem to be working properly. Also, do you know how I can obtain the standard deviation of a specific call option is (e.g. Morgan Stanley Call Option)? Can I use the ThinkorSwim platform to find the stand. deviation?
I'd appreciate the guidance!
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