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    14 views7 pages

    ExtensionsOfTheBlack scholesOptionModel PDF

    Uploaded by

    Matteo Getrali

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
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    BULLETIN OF THE INTERNATIONAL STATISTICAL INSTITUTE. BULLETIN DE LINSTITUT INTERNATIONAL DE SFATISTIQUE PROCEEDINGS OF THE 39TH SESSION ACTES DE LA 39° SESSION 4. VOLUMES : 4 TOMES 1973 VIENNA: VIENNE SEPARATUM Surge of variation 26d Moan squares Forotios Quacretic regression a site Additional for Linear torn 108.75 5.05 Additional Tor constant torn 6.0 03 Lack of ft ass.s2 16 258.75, luiense groups eteaco 3) 218.22 AK, = 0.15892 Ayky(0o0), # -0-0632 22 4 142590 x Brae adel Eck 9 = 0.0801 92 + 1.2900 x ssunnaste Puatiple Ainear roseeeston furctlene can be fitbed by me orthogonal polyn ‘This nothed allovs to inelwe ever nacaaeity of racanputing the segreeein coaf?ietents of all previously tno anaiyels of variance can aasily be computed from datormsnente aégune Liacortation dee fonctions da sépreastan multiple at Lingatze sout. tre réelisss & {F2i¢a de pelynensa oxthaganaux. Le mithode puswot explicatives aucconsivenent at da festa des oe signification peur ereque verinie euppisrentaire. Sone orthagania de nficteision et les aormas dea carrin de 2Yenalvae variance powvant étze calcuifes b 1'aice ge ofterminante compasses doa sannae dea cartés et onoduite den absacuationa. Cok, C. . [1958] 2. Royal Stat. Soc. (London) Seriee 8, 20, 406. Bra Eeltion, 149. ernaacen, R. and MIOEREZ, A, [1971] Sepersonts Gonbtoux 20, 293. TeGHEN, 9. [1952] Bull. Inst. Agron. gt Stab. Foch. ‘pwns, a. [1972] foV dn fodtzin une Bloleain 3, UISHART, 3. and METAKIDES, T. [ 3) Blonet elie EXTENSIONS OF THB BLACK-SCHOLES OPTION MODEL* Mathematics Depariment-University of Californie Tevine, California Summary, The Black-Scholes option theory 1s a breakthrough, thas simple hypotheses, provides a valuation formula using only observables, and explains actual prices, We solve the correspond- ng: problem for the twe typac of warrant hedges. Black and Scholes assume no cash dividends, For one cash dividend we give the condi. tion for the solution to be uachaaged. When the dividend affects the solution, we give upper and lower bounds. ‘The method extends to 1, Introduction, An option om common stock (ordinary shares} fe the right to ouy (a call or to sell (a pat) a specified aumber of shares (usually 100) at a specifies price (stviking price) untit a specified time (expiration date). A European option may be exer cised only at expiration. An Americas option may be exercised at sany time Bofors expiration ‘The common stock purchase warrant is an option similar to the call option, Warrants are issued by the company who possesses the stock the warrants claim. Terms typically are of the form A warrants +5 dollars obtain G shares of stock watil ime Let xit) be the stock price at time &, © the exorctze price of the option, t# the expiration time of the option, wit) the price of call on one share and the price of « put on one share. If yt=max(y,0) andy” = maxt-y, for American, options and ¢ #4, we) 8 (x © (xielee)”, and that ()ExlfI-c, Many othe? functional relationships are also aut lent or strongly suggested. The functional dependence of option prices on the price of the waderiying common har lad to formulae “The revearsh for this paper wee supported in pert by the Ate Force Office of Scientific Research under Grant AFOSR-70-1870C 522 for the option price a8 a function fel), tt, +++) oF ttock price, time tt until expiration, and a few other variables. Iq parti ccalar, the hope (successful! has been to eliminate most or all of the variables {fect commen stock price, by lumping itselt ‘them all inst ‘he extensive modera mathematical theory of opsions was initiated by Bechelier (1900), Thix lancmanie paper developed the theory of Brownian motion and applied it to option prices. It assumed stcck price changes were aormally distributed modern, statistical work shows that the lognormal distribution gives better sit) aud sidemttited volatility ¥ (1.e,, standard deviation pew wait timo} az a principal deteeminant of option price, entering the functional expression ia the form wv" (tht) Subsoquent mathematical and stat jen] work developed along several lines, Regression techniques were used to construct models (of past price behavior (Kassoul, 1965; Shelton, 1967, and others} Rational (normative) theories of option prices were developed by. e.g.) Samuelson (1965), Samuelson and Merton (1969), ene ethers ‘The lognormal model for etock prices yielded 4 natural expression for the price of an option ia terme of the normal distribution, Sea, ecgey Sprentle (1961), Hazbaugh (1965), Thorp (1969), and others Hedging technioxes (e,g., call options or warrants short, stock tong) as tn Thorp and Kassovt (1967), and Thorp (2971) give tnfo~ mation about the sae of options én optimizing portfolio performance 2: ‘These efforts have culminated in bresithrough by Black and Schole 1972, 1975). We eatch their theory for calls, (tis similar for pute and for straddles. Black and Scholes observe short and com- ‘mon stock long and continuously a sx leads to a viskless rate of return x, They angus that in market equilibriem tais must equal the rickioee rate of return in the merkel ‘They further assume: (4) ‘The short term interest sate ¥ Sa knowe and constant [b) ‘The distribution of possible stock prices at the end of any finite soterval ts lognormal, The stock price follows a random alk tn. cantimous time with variance proportional to the square of the square lof the stock price, ‘The variance rate of the retire on the stock is 323 le) The stock pays no fdands or other dictribations [é) "The option is "Baropean' ‘There are ne transaction coats (i) Its possible to borrow at rate x any fraction of the price of a security to buy K€ oF to hold (g) A short seller receives the price of the curity from 4 buyer, and will settle on some fature éate by paying the price of the security oa that date, ‘From this they show that the call price w satisfies the partial eilterential equation D Beta tame ty ewe 0 abject ta the boundary conditions whet) exe ee whe tt) =0 if 02x

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