the black scholes merton model

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1、Chapter2Theblack-scholes-merTonmodelAsyoucantellfromChapter1,optionsareinfactsimplefinancialinstru-mentsthatallowinvestorstosplitthefinancialexposuretoastockintoupsideanddownsiderangesandthenallowinvestorstogainoracceptthatexpo-surewithgreatflexibility.Althoughtheconcept

2、ofanoptionissimple,tryingtofigureoutwhatafairpriceisforanoption’srangeofexposureistrickier.ThefirstpartofthischapterdetailshowoptionsarepricedaccordingtotheBlack-Scholes-Mertonmodel(BSM)—themathematicaloptionpricingmodelmentionedinChapter1—andhowthesepricespredictfutures

3、tockprices.ManyfacetsoftheBSMhavebeenidentifiedbythemarketatlargeasincorrect,andyouwillseeinPartIIIofthisbookthatwhentherubberoftheorymeetstheroadofpractice,itistherubberoftheorythatgetsdeformed.Thesecondhalfofthischaptergivesastep-by-steprefutationtotheprinciplesunderly

4、ingtheBSM.Intelligentinvestorsshouldbevery,veryhappythattheBSMissuchapoortoolforpricingoptionsandpre-dictingfuturestockprices.ItistheBSM’sshortcomingsandthegeneralmarket’sunwillingnessorinabilitytospotitsstructuraldeficienciesthatallowustheopportunitytoincreaseourwealth.

5、Mostbooksthatdiscussoptionpricingmodelsrequirethereadertohaveahighlevelofmathematicalsophistication.Ihaveinterviewedcandidateswithmaster’sdegreesinfinancialengineeringwhoindeedhadaveryhighlevelofmathematicalcompetenceandsophisticationyetcouldnottranslatethatsophisticatio

6、nintothesimpleimagesthatyouwillseeoverthenextfewpages.2930 • TheIntelligentOptionInvestorThischapterisvitaltosomeoneaspiringtobeanintelligentoptionsinvestor.Contrarytowhatyoumightimagine,optionpricingisinitselfsomethingthatintelligentoptioninvestorsseldomworryabout.Muchm

7、oreimportanttoanintelligentoptioninvestoriswhatoptionpricesim-plyaboutthefuturepriceofastockandinwhatcircumstancesoptionpricesarelikelytoimplythewrongstockprices.Intermsofourintelligentoptioninvestingprocess,weneedtwopiecesofinformation:1.Arangeoffuturepricesdeterminedme

8、chanicallybytheoptionmarketaccordingtotheBSM2.Arationallydeterminedvaluationrangegeneratedthroughaninsi