option pricing model


Also found in: Acronyms.

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 ?
Macbeth, 1982, "Further Results on the Constant Elasticity of Variance Call Option Pricing Model", Journal of Financial and Quantitative Analysis, 17:533-554
A 10-period trinomial call option pricing model is used to find the freely traded price of the ESO.
Because vesting requirements and the nontransferability of employee stock options reduce their value relative to freely traded stock options, the proposed accounting would require adjustments be made to the values provided by traditional option pricing models to compensate for these differences.
However, one important feature about the Black and Scholes option pricing model is that all its key factors are observable except volatility of the underlying asset.
The option pricing model developed in this study suggests that whether insurers change their risk taking depends on an implicit threshold, measured in terms of the capital ratio, at which the sum of the expected regulatory cost and the expected loss of franchise value equals the gain from the put option expropriated from guarantee funds.
Bezdek, "Numerical solutions for option pricing models including transaction costs and stochastic volatility," Acta Applicandae Mathematicae, vol.
In this paper, we are interested in the option pricing model with transaction costs proposed by Barles and Soner [3] that are motivated by Hodges and Neuberger [4].
Duan, "The GARCH option pricing model," Mathematical Finance, vol.
By relaxing some of the restrictive assumptions, such as the assumption of constant volatility and the geometric Brownian motion for the price of the underlying asset, many option pricing models have been proposed.
The intent of developing this option pricing model is to find out which option will be viable and then to use these option prices as pay-offs in an incomplete game to find the Nash Equilibrium of such a game.
One of the most important things I learned while taking upper-level college finance courses was the BlackScholes option pricing model. The complex formula, created by Fisher Black and Myron Scholes in 1973, earned Scholes a 1995 Nobel Prize in economics (Black was ineligible for the prize due to his death in 1995), spawned the popularity of derivatives trading and helped usher in the housing bubble and subsequent banking meltdown.
During the same year, the option pricing model popularized by Fischer Black and Myron Scholes,