B2-M7 Financial Valuation Methods 2

Question 1

what are the inputs of the black-scholes model?

Answer 1

• current price of underlying stock
• option exercise price
• risk-free interest rate
• time until expiration
• measure of risk tied to the underlying stock

Question 2

what are the differences between American style option vs Black-scholes (European style)?

Answer 2

• American style options can be exercised at any time prior to their expiration date
• European style options can ONLY be exercised on their expiration date

Question 3

what are the two primary differences between black-scholes model and binomial (cox-ross-rubinstein) model?

Answer 3

• consideration of the option over a period of time (binomial)
• can be used for stocks that pay dividends without modifying the model (binomial)

Question 4

what are the 4 methods for determining account estimates of fixed assets?

Answer 4

• historical information
• market information
• expected usage
• estimates from experts