Simple Formulas to Option Pricing and Hedging in the Black- Scholes Model
AbstractFor option whose striking price equals the forward price of the underlying asset, the Black-Scholes pricing formula can be approximated in closed-form. A interesting result is that the derived equation is not only very simple in structure but also that it can be immediately inverted to obtain an explicit formula for implied volatility. In this contribution we present and compare the accuracy of three of such approximation formulas. The numerical analysis shows that the first order approximations are close only for small maturities, Polya approximations are remarkably accurate for a very large range of parameters, while logistic values are the most accurate only for extreme maturities.
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Bibliographic InfoPaper provided by EconWPA in its series Finance with number 0511005.
Length: 9 pages
Date of creation: 15 Nov 2005
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Note: Type of Document - pdf; pages: 9
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Option pricing; hedging; Taylor; Polya and logistic approximations;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
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