Education Technology

Black-Scholes Option Pricing Model

Published on 06/09/2008

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
  • 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