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Black scholes model

Ritzz (CA Final - Article ) (365 Points)

21 February 2014

Dear Friends

I cannot understand the Black Scholes Concept and its formula. Can someone please explain its concept in an easy language?

Regards

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6 Replies

@*CS Siddharth Bumb. * (B.Com, CA Final, CS ) (5270 Points)
Replied 21 February 2014

Dear.. Till now many people didnt understand how such formula derived and logic behind it... Just RATTA MAAR... i tried many times.. Read some books also but didnt find the logic behind it...

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CA Piyush Jhawar (Chartered Accountant) (545 Points)
Replied 21 February 2014

@ Ritzz

The derivation of Black and Scholes option pricing model is beyond the scope of our CA Final Syllabus.It won the Nobel Prize in Economics by Fisher Black and Myron Scholes and Robert Merton (However Black died before he could receive it.)

It took 28 years to develop the model and to understand it, so that it is why you will not be able to get the logic or the derivation behind it, Just consider it as another option pricing model which gives you the fair option price that ought to be in the market and thus you can determine wether the option premium is over priced or under priced in the market and take an appropriate arbitrage strategy.

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CA Piyush Jhawar (Chartered Accountant) (545 Points)
Replied 21 February 2014

@ Ritzz

If you remove the N(d1) and N(d2) part from the equation which is just calculations regarding the option premium probabilty in the near future, you will see the basic intention is to bring the option premium at a later period to the current price by using the risk free rate

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gak (vv) (62 Points)
Replied 21 February 2014

How to find N(d1) or N(d2). The question contains only the "number from S.D from mean and area of the left ( one tail) . We can directly find N(d) from z table but can we carry z table values sheet to exam hall?

(Guest)

Originally posted by : gak
	How to find N(d1) or N(d2). The question contains only the "number from S.D from mean and area of the left ( one tail) . We can directly find N(d) from z table but can we carry z table values sheet to exam hall?

Even I have the same question

CA Piyush Jhawar (Chartered Accountant) (545 Points)
Replied 23 February 2014

@ Ritu, Gak

No you cannot carry any sheet in exam and most certainly you will not be given any sheet in the exam hall regarding tables.But below the question in the paper itself the relevant extract will be given!