VRM 15. The Black-Scholes-Merton Model

Learning Objetives

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

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

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

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

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

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

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

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