In the previous chapter we examined some of the basic issues relating to options and looked at possible return profiles. In this chapter we look at the more complex question of option pricing, and in particular examine the factors that determine the price of an option, first intuitively and then analytically using the famous Black-Scholes option pricing formula which was put forward in a classic paper by Black and Scholes (1973). Although there have been many refinements to the Black-Scholes formula it has become one of the most famous equations of economics and is widely used by practitioners to determine appropriate option premiums. We also consider the relationship between call and put premiums via the put-call parity condition.
KeywordsOption Price Call Option Share Price Implied Volatility Strike Price
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