Questions tagged [black-scholes]

Black-Scholes is a mathematical model used for pricing options.

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Average Strike Option with bounds

I'm looking to price a call option with an exotic feature. The price I'm trying to calculate at time $t=0$ is $$C = E^\mathbb{Q}[(S_T-K_T)^+]$$ where $S_t$ is the stock ...
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No arbitrage conditions for normal implied volatility

usually the term implied volatility refers to Black-Scholes implied volatility (also Log-Normal volatility): it is defined as a quantity which when plugged in the Black-Scholes formula returns the ...
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Cash-or-Nothing Call Option

I am trying to price a cash or nothing call option and I know know that the Cash or Nothing formula for a call option is $C(t,s)=Xe^{-r(T-t)}*N(d)$ If I have payoff X=100 r=0.03 T=2 $\sigma=0.3$ I ...
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Why the volatility of log-returns and not the volatility of the absolute level of the underlying is used in the Black-Scholes model?

If I want to price an option with the B-S model, why do I have to use the standard deviation of the log-returns of the underlying for the sigma parameter and not just the standard deviation of the ...
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Implied volatility is returning infinity

I am trying to calculate implied volatility using javascript , I have following code ...
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On which model is based the Finite Differences method for implied volatility computations?

I am very new to finance, so I don't know if my question makes sense but I have seen that there are different methods to estimate the implied volatility of an American Option. One of them is the ...
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Delta hedging an option with earlier expiry

The answer here states: For instance a volatility product that would expire at 10:42 am on a random day would be off term. One that expires at the same time than a major listed contract would ...
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Historical volatility calculation to price options with the Black-Scholes formula

I'm looking for a reference algorithm for calculating historical volatility to price options. I know there are several volatility calculation models that use the time series of the underlying's ...
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Classic dynamic delta-gamma hedging in Python

I am trying to run a delta-gamma hedge for a Black-Scholes model in Python.The Euler disceretizatioin of the paths is the simplest possible. I wrote the code below but the PnL looks undesirable and ...
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Black Scholes on Eurodollar Options

I am trying to replicate the Black Scholes results of CME option calculator for options on Eurodollar Options. (link) I am trying to replicate the implied volatility result by unaltering the spot and ...
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Risk-neutral Simple Return Moment Log-return Moment

I am trying to find a way to link Risk-neutral moment of simple return to risk-neutral moment of log-returns. Specifically, by making the same standard assumptions of the Black-Scholes model with the ...
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Explicit formula replication of variance swap using vanilla option under black and scholes model with nonzero risk-free rate and nonzero dividend [duplicate]

I didn't find the formula for the following portfolio (variance swap replication) with nonzero risk-free rate and nonzero dividend under black and scholes model : (1) I found formula and proof only ...
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Replication of variance swap using vanilla option under black and scholes model with nonzero risk-free rate and nonzero dividend [duplicate]

I didn't find the formula for the following portfolio (variance swap replication) with nonzero risk-free rate and nonzero dividend under black and scholes model : I found formula and proof only with ...
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GBM probability of hitting non constant barrier

I know there is a formula for probability of hitting a constant barrier for GBM/BM (See page 651 in Martinagle Methods in Financial Modelling). Is there a formula for non-constant barrier? The ...
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Show that $Ae^{rt}$ is a solution of the Black-Scholes equation. Why should this be so?

The following is taken from Mark Joshi's Concepts and Practice of Mathematical Finance, second edition, exercise $5.6$. Question: Show that $Ae^{rt}$ is a solution of the Black-Scholes equation. ...
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Determining the No Arbitrage price of max[B(T), S(T)]

Following is given, $dB(t)=rB(t)dt$ $dS(t)= (r-\delta)S(t)dt+\sigma S(t)dW(t)$ where, $r$ is the risk-free interest rate, $\delta$ the continous dividend yield $\sigma$ is the stock asset ...
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Proving a process is martingale under the Risk Neutral Measure

Show that for any $\lambda \in \Re$, the process $Y_{\lambda,t}$ defined as: $$Y_{\lambda,t} = (S_t/S_0)^\lambda e^{-(r\lambda-\lambda(1-\lambda)\sigma^2/2)t}$$ is a martingale under the risk ...
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Relationship between asset volatility and debt and equity value

So how I understand it, higher asset volatility implies a higher call option price. The Merton Model holds that the value of equity is a call option. This therefore implies that the equity value must ...
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Option on Futures vs. Stocks

The Black-Scholes call on a Futures is valued as: $$C_t=e^{-r(T-t)}[F_tN(d_1)-KN(d_2)]$$ It holds: $F_t=S_te^{r(T-t)}$. If I plug this back in, I get the Black-Scholes call on a stock:  C_t=S_tN(...
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Black Scholes PDE

I seen two variations of the Black-Scholes PDE with either $+{\frac {\partial V}{\partial t}}$ or $-{\frac {\partial V}{\partial t}}$, and wanted to ask why that is? a) https://en.wikipedia.org/wiki/...