option pricing model

Option Pricing Model

Any formula or theory for mathematically determining the correct price for an option contract. An option pricing model may take into account the strike price, the time until the expiration date, the price of the underlying asset, and the standard deviation of the underlying asset's return. The time until the expiration and the price of the underlying asset are particularly important. Option pricing models have a large margin of error because the price of the underlying asset or other factors may change over the life of the contract. Most option pricing models also operate under certain assumptions that may affect their accuracy. The most common option pricing models are the Black-Scholes option-pricing model and the binomial model.

option pricing model

A mathematical formula for determining the price at which an option should trade. The model expresses the value of an option as a function of the value of the underlying asset, length of time until maturity, exercise price, yields on alternative investments, and risk. See also Black and Scholes Model.
References in periodicals archive ?
The author used the option pricing model of Merton (1973) with the dilution adjustments proposed by Galai and Schneller (1978).
The experimental-sets structures the option pricing model through ENFIS using various time horizon strategies and the comparative-sets structures the option pricing model by BSG with considering the historical volatility and implied volatility.
To test the pricing precision of the option pricing model developed in this paper, data on put options on the DJIA were collected for a five year period commencing in November 1997 and ending in October 2002.
Since such a valuation usually is not available for most share-based payments, FASB recognizes that most companies will use an option pricing model to estimate the value.
Cox and Ross (1976) and Merton (1976) were among the first to apply a jump process to option pricing models.
He also highlighted other problems that could be caused by the intended option pricing models, especially where private companies were concerned.
The ASB suggests that the value of the share options at vesting date should be charged to the profit and loss account at their "fair value" as computed by an option pricing model and that such charges should be accrued from the grant date to the vesting date.
10) A more sophisticated option pricing model, in contrast, may require the trader to guess values of model variables more difficult to obtain in real time, such as the speed of mean reversion of volatility and others.
Based on the above information, the value of each option determined using the Black-Scholes option pricing model is $4.
Under the FASB's proposal, the ESO represents compensation expense with the value of the option determined by an option pricing model for public companies and by the minimum value method for nonpublic firms.
The Black-Shoales option pricing model is also introduced.