Option Pricing Theory Sample Clauses

Option Pricing Theory. The option pricing theory developed by Black, Scholes(1973), and Xxxxxx(1973), for pricing financial derivatives is the building block of the RCP option pricing approach in this paper. The concept of option pricing theory in finance was imported to seek to value managerial flexibilities on real assets or properties. The option pricing theory is based on the assumption that the stock price follows an uncertain diffusion process of a log-normal distribution called a ‘Geometric Brownian Motion' proven to appropriately model the price of an asymmetric payoff of financial securities(Black and Scholes. 1973; Xxxxxxxxxx. 1998). The uncertainty of the value of real asset is reasonably reflected through this diffusion process(Xxxxxxx and Xxxxxxxx. 1978; Xxxxx and Pindyck. 1994). Equation<4> describes the diffusion process of Geometric Brownian motion process in a capital market:  dS  u dt + σ dx <4> S Where, S is stock price, u is instantaneous rate of return, σ is instantaneous standard deviation of rate of return, and dx is random increment to a standard wiener process. In the option pricing theory, which falls into two folds; Black-Scholes model(continuous-time approach) and Binomial model(discrete-time approach), the value of a European call option can be obtained by solving the partial differential equation derived by Black and Scholes(1973), subject to one terminal and two boundary conditions(Jun and Xxx. 2009). This Black-Scholes equation is based on the complex mathematical process and that is why the Black-Scholes equation is analytically limited in modeling and calculating the option. For this reason, it has been necessary to use a numerical solution such as the binomial model that this paper follows(Cox et al. 1979). Recently, we can see there have been more efforts to evaluate real assets based on the option pricing theory.
Sample 1
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Related to Option Pricing Theory

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