VRM 15. Black Scholes Merton Model: LOs

a) Explain the lognormal property of stock prices, the distribution of rates of return, and the calculation of expected return.

b) Compute the realized return and historical volatility of a stock.

c) Describe the assumptions underlying the Black-Scholes-Merton option pricing model.

d) Compute the value of a European option on a non-dividend-paying stock using the Black-Scholes- Merton model.

e) Define implied volatilities and describe how to compute implied volatilities from market prices of options using the Black-Scholes-Merton model.

f) Explain how dividends affect the decision to exercise early for American call and put options.

g) Compute the value of a European option using the Black-Scholes-Merton model on a dividend-paying stock, futures, and exchange rates.

h) Describe warrants, calculate the value of a warrant, and calculate the dilution cost of the warrant to existing shareholders.