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	Black-Scholes Option Pricing Model

Activity Overview

In this activity, students will deal with the Black -Scholes formula, that can be used to determine the fair value of a call option. A call option gives its holder the right to purchase an asset at a predetermined price and time. Students will determine which call option should be purchased and which is overpriced by comparing the selling price of the option with the value from the Black-Scholes formula.

Before the Activity

See the attached PDF file for detailed instructions for this activity

Print pages 49 -5 2 from the attached PDF file for your class

Activity Downloads:

(file types)

TimeValueMoney_TI83_Act16.pdf

During the Activity

Distribute the pages to the class.

Follow the Activity procedures:

Calculate the Black-Scholes value for a call option given the time of maturity, exercise price of the option, current price of the underlying asset, risk of the stock and risk free interest rate

Plot a graph of stock price versus the actual value of the option

When the stock price is less than the exercise price of the option, the option is worthless

When the stock price is more, the value increases as the stock price increases

After the Activity

Review student results:

As a class, discuss questions that appeared to be more challenging

Re-teach concepts as necessary

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