Quantitative Finance Stack Exchange is a question and answer site for finance professionals and academics. Join them; it only takes a minute:

Sign up
Here's how it works:
  1. Anybody can ask a question
  2. Anybody can answer
  3. The best answers are voted up and rise to the top

I am looking at closed-form options approximations, in particular the Bjerksund-Stensland model.

I have run into a very basic question. How should I scale the input variables in regard to time? My assumptions would be:

  • r (riskless interest rate) should be an annual rate, so if the 3-month T-bill yields 0.03%, then I should use .12.
  • σ (variance) should be annual (and according to How to calculate future distribution of price using volatility?, variance scales with the square root of time.
  • T (time to expiration) should be in years, so expiration in 83 days would be 83/365 (=0.227397) years.
  • b (cost of carry) should be an annual rate.

Have I got that right? Are there other input variables that I will need to scale before plugging in?

share|improve this question
Your T-bill yield quote is probably already annualized using a 360 day year. investopedia.com/articles/bonds/08/… – user508 May 17 '11 at 20:51
@user508, thank you for the correction. So when they discount my $1000 T-bill, I should expect to get 7 or 8 pennies each 3 months. (I'm glad it's electronically deposited, lest the postage exceed the check.) – rajah9 May 18 '11 at 12:46
up vote 1 down vote accepted

Yes, that's correct.
(use the same time unit for all of the parameters)

share|improve this answer

Your Answer


By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.