Author Question: The period of time over which there is at least one fixed input is the A) calendar year. B) long ... (Read 156 times)

james0929 · **on:** Jun 30, 2018

The period of time over which there is at least one fixed input is the
A) calendar year.
B) long run.
C) short run.
D) market horizon.

Question 2

Derive the Black-Scholes formula to represent the relationship between the price of an option and the price of its underlying stock.

dreamfighter72 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

C

Answer to Question 2

Let C be the value of a call option, with
S = current price of the underlying stock
K = the strike price
ln = natural logarithm to base e
r = interest rate
T = time to expiration
= standard deviation of returns on underlying stock
N1(d1) and N2(d2) = cumulative standard normal distribution functions.
Then,
C = SN(d1) - Ke-rTN(d2),
With
d1 = ln(S/K) + (R + 22 T and d2 = d1 - T