Can Black-Scholes formula be used in pricing executive stock options? Explain

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Expert Solution

There are three valuation method of stock option is as follows:

a) Binomial methods

b) Risk neutral method

c) Black- Scholes method

The formula of Black Scholes method is as follows:

S = Spot price

X= Exercise price

r = interest rate

t = time

The Black-Scholes method is the theoretical valuation method, it value the option not more the compensation for the writer of the option and completion hedging the risk of buying the stock.

The assumption of Black scholes method is as follows:

· European option are considered

· No cost of transaction.

· Stock does not pay any return like dividend.

· Stock movements is like random walk

· Interest rate are constant

jeff jeffy answered 2 years ago

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