Can someone explain me why the economic growth of a company is irrelevant in determining the option price. Especially for options with a long maturity e.g. 5 years it seems to me that for a high growth company this can make a lot of a difference ?


Estimated economic growth is built into the stock price. Therefore it is, albeit hidden, inside any model that takes stock price into account.

One of the puzzles of pre Black-Scholes world was how to incorporate projected growth into an option price. One of Black and Scholes' (and Merton) main realizations was that they didn't need to parameterize growth (or any other thing discounted in a stock price.)

  • $\begingroup$ But the unwinding of this discount increases the capital of the company, and assuming no dividend is paid and the same P/B ratio then the stock price increases just due to the unwinding.So I still don't see why you can neglect growth. $\endgroup$ – Jacq Apr 4 at 14:07
  • $\begingroup$ I think you might be mistaking discount here for an actual discount (lowering) of something. Discounting is finding the present value of all future cash flows, dividends, etc and their respective growth, dividend growth rates, etc. en.wikipedia.org/wiki/Discounted_cash_flow $\endgroup$ – Daniel Sims Apr 4 at 14:13
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    $\begingroup$ So because we assume all future cash-flows are in the current stock price, which we call present value, the only things that matters to bring this value into the future is the risk free rate. I think I understand it now. Thanks. $\endgroup$ – Jacq Apr 4 at 14:21

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