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Lecture 9 – Valuing Stock Options: Black-Scholes Model
12 Pages • Partial Study Notes • Year: Pre-2018
Lecture 9 – Valuing Stock Options: Black-Scholes Model The Black-Scholes Random Walk Assumption: • Consider a stock whose price is S • In a short period of time of length Δt the change in the stock price is assumed to be normal with mean μSΔt and standard deviation • μ is expected return and σ is volatility The Lognormal Property: • These assumptions imply ln ST is normally distributed with mean: o ln S0 + (μ – σ2 / 2)T • And standard deviation: o • Because the logarithm of ST is normal, ST is lognormally distributed
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