Black Scholes Formula

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risk taker
Posts: 41
Joined: Wed Aug 10, 2011 12:52 pm

Black Scholes Formula

Postby risk taker » Fri Dec 21, 2012 7:20 am

Hi Carol,

BS formula for a standard european call is composed of two standard normal functions. And the formula is arrived at by decomposing an integral. I cant work it out this decomposition to give me this formula. Is there some mathematical rule I need to follow while doing the decompositon? Could you shed some light on how to go about decomposing??

Thanks!

risk taker

I was reading Rennie and Baxter. Basically the question is to do with excersie 3.14. Hope you can help me. I spent hours but to no avail.

risk taker
Posts: 41
Joined: Wed Aug 10, 2011 12:52 pm

Re: Black Scholes Formula

Postby risk taker » Fri Dec 21, 2012 9:51 am

Hi carol,

One other question: in the Black scholes framework, continuously compounded interest rate r is assumed to be constant. What do we mean by this constancy? Do we mean that at any time when we value the option, r that is applicable to any future t before expiry is the same? Does it also mean that any future r at any future time t that is applicable to T-t is the same?? Do the two meanings essentially mean the same thing?

Thanks for your help

risk taker

coalexander
Posts: 815
Joined: Sun Sep 28, 2008 10:30 pm

Re: Black Scholes Formula

Postby coalexander » Sun Mar 17, 2013 1:04 pm

Hi

apologies for l;ate reply, I have been really busy lately.

I can't help you intuition with Baxter and Rennie but I can answer your second question -- the answer is yes!


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