TASK 1

Black Scholes Model

First initiated by Myron Scholes, Fisher Black, and Robert Merton, the concept stands out as one best techniques of determining fair prices of options. One of the axioms of the model is that the volatile prices of stock take a log-normal distribution (Edeki, Ugbebor, and Owoloko 2015). The assumption is hinged on the fact that stock prices cannot take negative values. The framework incorporates five key components namely volatility, stock expiry time, current stock value, vulnerability-free rate, and the strike option price. It is applied in the assumption that all the five components are constant in nature.

The model is majorly used to compute the implied volatility of stock prices. When the venture capitalists anticipate that the economy is on the verge of an economic downturn, volatility tends to surge. In such situations, the investors believe that it is highly risky to place their confidence on the stocks. On the other hand, an expected economic boom triggers a downward trend in the volatility of options. This is in line with the investors’ belief that holding onto the stocks is bound to fetch high prices and consequently, reap optimal benefits.

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