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The Intuition Behind Option Valuation: A Teaching Note
Thomas A. Grossman University of Calgary - Haskayne School of Business Stephen G. Powell Dartmouth College - Tuck School of Business Kent L. Womack Dartmouth College – Tuck School of Business Ying Zhang Affiliation Unknown Abstract: Option valuation is one of the most difficult topics to teach in the basic finance course. It is intimidating to many students as being too abstract and involving too much mathematics. The purpose of this paper is to introduce the essential ideas behind option valuation using an intuitive and visual approach. We focus on building the student's intuition about uncertainty in stock prices and its impact on option value through simple examples and simulation. Nothing more than basic knowledge of probability distributions and present value is required to understand our approach. Case and Teaching Paper Series Date posted: June 28, 2002 ; Last revised: July 13, 2002Suggested CitationContact Information
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