5. Full Black-Scholes Model

In this chapter, the option pricing spreadsheet is expanded to add full Black-Scholes functionality. Full functionality refers to the ability to price options under any set of assumptions, including option terms, stock prices, strike prices, risk-free rates, dividend rates, and volatilities.

To get started, let’s review the relationships between random variables, discussed in Chapter 2, “Random Variables and Option Pricing.” Figure 5.1 is an updated version of Figure 2.1, where the Stock Return Mean has the correct value of –4.50%.

Image

Figure 5.1. Modified Figure 2.1: the spreadsheet formulas

In the figure, Column A contains ...

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