Saturday, June 1, 2019

HP Prime and Casio fx-CG 50: Black Scholes-Merton Model

HP Prime and Casio fx-CG 50:  Black Scholes-Merton Model

Introduction

The Black Scholes-Merton model, often known as the Black-Scholes model, is a model to estimate the call and put options.  Even though this model is designed for European options, the model is used on options worldwide.  The formula to calculate the call option is:

C = S * N(d1) - K * e^(-r * T) * N(d2)

where:

C = call price
S = stock price
K = exercise price
r = risk free rate (percent)
v = implied volatility (standard deviation of log returns) (percent)
(also symbolized as σ)
T = the time until the stock matures, in the measure in years  (if you are given the number days, divide this number by 365 (or 365.25, 366, 360))

N(d1) and N(d2):  lower tail probability of the Normal Distribution of points d1 and d2, respectively.  (NormCDF( -∞,d1) and NormCDF(-∞,d2))

d1 and d2:

d1 =  ( ln(S/K) + ( r^2 + v^2/2 ) * T ) / ( v * √T )

d2 = d1 - v * √T

Normal Distrubtion:

NormCDF(a, b) = 1 / √(2 * π) * ∫( e^(-t^2/2) dt, a, b)

Also note:

Expected Stock Value = S * N(d1)
Expected Strike Value =  K * e^(-r * T) * N(d2)
Call Price = Expected Stock Value - Expected Strike Value

HP Prime:  Black-Scholes Model

There is no need to enter a program to calculate Call Price and Put Price.  The Black-Scholes Model is in the Finance app.  Select Black-Scholes on the Symb page.  Enter and solve for call and put price on the Num screen.



Casio fx-CG50 Program BLACKSCH

This program calculates the expected stock value, expected strike value, and the call price. 

"BLACK SCHOLES"
"STOCK PRICE: "? → S
"STRIKE PRICE: "? → K
"TIME-EXPIR. (DAYS): "? → T
T ÷ 365.25 → T
"RISK FREE %: "? → R
R ÷ 100 → R
"VOLITALITY σ%: "? → V
V ÷ 100 → V
(ln (S ÷ V) + (R + V^2 ÷ 2 ) * T) ÷ ( V * √T ) → D
D - V * √T → E
S * NormCD(-10,D) → W
K * e^(-R * T) * NormCD(-10, E) → X
W - X → C
"EXEPECTED STOCK VALUE"
RndFix(W,2) ⊿
"EXPECTED STRIKE VALUE"
RndFix(X,2) ⊿
"CALL PRICE"
RndFix(C,2)

Example

Input:
Stock Price:  $55.00
Strike Price: $41.00
Days to Expiration: 90 days    (90/365.25 ≈ 0.25 year)
Risk Free Rate:  2.5%
Volatility Rate:  25%

Output:
Expected Stock Value: $54.64
Expected Strike Value:  $40.37
Call Option: $14.27

Source:

Black-Scholes-Merton Brilliant.org.  Retrieved April 24, 2019, from https://brilliant.org/wiki/black-scholes-merton/

Eddie

All original content copyright, © 2011-2019.  Edward Shore.   Unauthorized use and/or unauthorized distribution for commercial purposes without express and written permission from the author is strictly prohibited.  This blog entry may be distributed for noncommercial purposes, provided that full credit is given to the author.

1 comment:

  1. Phew, what a critical theme. I know some guys who thought to have understood the functioning of options. Some did win some money at beginning. But lastly all lost a lot of money, some of them all what they had. I bought some put options just for fun, listenign every evening the handelsblatt Börsenmagazin in TV. Analysts told that 3 events would decide the further price. All 3 events did happen, but the price didnt go down as told but went a little up. So my "fun" investement had after 4 weeks about 1/12 worth of that what I paid. IoI

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