Black Scholes option pricing model
You'll learn how to use the Black-Scholes option pricing model to calculate the value of call options—a key technique for investment appraisal and real options analysis.
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In this lesson
- 0:00 Black-Scholes option pricing model overview
- 1:28 Identifying the five equation inputs
- 2:22 Using normal distribution tables correctly
- 3:12 Working through a practical example
- 6:10 Calculating d1 and d2 step by step
- 7:48 Looking up values and adjusting for sign
- 8:36 Computing the final call option value
- 9:32 Key assumptions and limitations
- 10:26 Real-world applications and flexibility valuation
About this lesson
This 11-minute lesson walks you through identifying the five essential variables (underlying asset price, exercise price, risk-free rate, volatility, and time to expiry), calculating d1 and d2, using normal distribution tables, and applying the formula to real scenarios. You'll understand both the manual process and how to use the spreadsheet calculator available in the exam, plus the key assumptions and limitations of the model. This concept appears across advanced financial modules and is essential for valuing flexibility in long-term investment decisions.
Duration: 11m
Transcript
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