DER 04.1 Option valuation: Analytical formulas

Valuing an option relative to its underlying benchmark requires an assumption about the benchmark’s price distribution. Under the assumption that the benchmark’s price distribution is lognormally distributed, many valuation results may be derived. One such valuation result is the infamous Black-Scholes European-style option valuation formula.

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• Required reading

  • Whaley, 2006, Ch. 7, Valuing standard options analytically

  • Whaley, 1997, Building on Black-Scholes, Risk (December), 149-156

  • Steiner, 2012, Ch. 1, Wall street: The first domino

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• Lecture notes

  • Slides

  • Supporting files​

    • Simple binomial valuation.xlsx

    • Stock option valuation.xlsx

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