Evaluation of Options using the Black-Scholes Methodology

Abstract

This paper discusses how to obtain the Black-Scholes equation to evaluate options and how to obtain explicit solutions for Call and Put. The Black-Scholes equation, which is the basis for determining explicit solutions for Call and Put, is a rather sophisticated equation. It is a partial differential equation of the second order, parabolic, similar to the heat equation. The terms of the equation express diffusion in a homogeneous environment, convection and reaction. The main objective of the paper is to present the Black-Scholes methodology and apply this methodology on the underlying asset of the nature of the listed stock on the Bucharest Stock Exchange. Also, a secondary objective is to compare the results obtained in this paper with our results in an article where we determined the values for Call and Put by Monte Carlo simulation.

Keywords

• black-scholes equation
• stochastic
• monte carlo simulation