Put option price equation
It is very easy to make a mistake. If you want to use the Black-Scholes formulas in Excel and create an option pricing spreadsheet, see detailed guide here:. Option Greeks Excel Formulas.
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The Black-Scholes-Merton pricing formula is. The other two variables are. It would be nice if we could simply carry out the additions, multiplications, divisions, etc.
The situation is a little more difficult than that, however. It is true we can calculate the numerator of the expression for d 1 , using scalar operations where appropriate, and probabilistic operations to add the last two terms together.
Evaluating the price probabilistically could be a major challenge. A different way of presenting the same problem gives the answer without difficulty. The present value of the strike price is just Xe —rT , an expression that involves only one random variable, r , and can be readily computed. To illustrate, Figure 1 shows the distributions of the present values of X and S T.