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?