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 ?
Hence, we make an assumption that Black and Scholes (1972) option pricing model is valid and therefore, in this study the pricing efficiency of index options market in India is examined by using Black and Scholes model for valuing the index options.
Bezdek, "Numerical solutions for option pricing models including transaction costs and stochastic volatility," Acta Applicandae Mathematicae, vol.
This article explains real options analysis and valuation theories as they apply to real estate, including financial option pricing models, the Black Scholes-Merton model, real options analysis, binomial options models, and Monte Carlo simulation.
By incorporating clear verbiage, clever vignettes and to-the-point explanations complete with interesting historical references, Pricing the Future makes for a fascinating account of not only the Black-Scholes option pricing model, but of modern finance in general.
Also, other available techniques are the Paired Sales Analysis, the Contingent Valuation Analysis, Option Pricing Model and the Hedonic Model.
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.
The binary option pricing model assumes two outcomes and discrete time periods.