Black Scholes Model

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Black Scholes Model

A model for mathematically pricing options. The model takes 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 model assumes that the option can only be exercised on the expiration date, that it will provide a risk-free return, and that the volatility of the underlying asset will remain constant throughout the life of the contract. The calculation is slightly different for calls and puts. See also: Option Adjusted Spread, Option Pricing Curve.
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Since the model will be derived from the Black-Scholes pricing model for dividend-paying stock options, then the assumptions used in this study will be very similar with the assumptions made by Black and Scholes (assumptions 1 to 7):
Constant Volatility--one of the major drawbacks of the Black-Scholes pricing model is that it assumes volatility to be constant since the volatility is almost always never constant, especially for actively traded stocks.
Constant interest rates--similar to the case of volatility, while this is a limitation of the Black-Scholes pricing model, having a constant interest rate assumption will have a small impact in the study since we will only be comparing the change in the price of the financial assets between three trading periods.
Liquidity--the Black-Scholes pricing model assumes that the market is perfectly liquid and it is possible to purchase and sell any amount of the stock or options or their fractions at any time.
In the Black-Scholes pricing model, the volatility is difficult to be estimated.
Most experts believe the Black-Scholes pricing model does not provide an accurate, reliable or consistent measurement of the fair value of stock options," says Chambers.
The fair value method and the Black-Scholes pricing model would wreak havoc on Cisco's income statement.
5 million in shares of Crdentia's common stock, subject to adjustment based on the iVOW bank and financing debt assumed by Crdentia, the value of any uncollected accounts receivable at closing and the value of any iVOW warrants assumed by Crdentia determined using the Black-Scholes pricing model.
Related to the Series F issuance, there will be an amount yet to be determined allocated to the warrants issued to the purchaser of the Series F stock based on their relative fair value as computed by using the Black-Scholes pricing model.
As required by current accounting practices, the company revalued those securities using a Black-Scholes pricing model.
In addition, when shares of Class A Preferred Stock were initially issued, a Black-Scholes pricing model was used to value the beneficial conversion feature of those securities.