Black-Scholes and Binomial Option Pricing Models Outline

Option Pricing Models

Mathematical frameworks used to determine the fair value of an option.

Binomial Option Pricing Model

A model that uses a discrete time framework to represent potential stock price movements over specified periods.

Continuous Stock Price Variation

Assumption in the Black-Scholes model that stock prices can change continuously rather than at discrete intervals.

Black-Scholes Formula

A mathematical equation used to calculate the price of European call and put options based on certain parameters.

Call Option Pricing Formula

C = S N(d_1) - K e^{-rT} N(d_2) where C is the call price, S is the stock price, K is the exercise price, r is the risk-free rate, T is time until expiration.

Sensitivity Analysis

The study of how variations in input values affect the outputs of the option pricing model.

Nobel Prize Contributions

Recognition of the significance of the Black-Scholes model and differential equations in finance.

Dividend Yield (Y)

The annual dividend payment divided by the stock's current price, which affects option pricing in the Black-Scholes-Merton model.

Market Equilibrium

A state where supply and demand balance, affecting arbitrage and market efficiency.

Black-Scholes-Merton Model

An extension of the Black-Scholes model that incorporates dividend yield.