An Exposition on the Mathematics and Economics of Option Pricing

Business Education & Accreditation, v. 5 (1) p. 1-16

16 Pages Posted: 29 Jan 2013

See all articles by Luke Miller

Luke Miller

Saint Anselm College

Mark Bertus

Auburn University

Date Written: 2013

Abstract

The application of options pricing theory to value irreversible investment decisions has witnessed a marked increase over the last decade. For instructional and simplified applications, the Black-Scholes model is commonly demonstrated due to its tractability and acceptance in the finance community. This paper provides a detailed mathematical exposition of the Black-Scholes model. The main contribution of this paper is the step-by-step instructional account of the Black-Scholes model that can be used directly in the classroom to introduce stochastic calculus, arbitrage-free valuation, and option-pricing theory. In contrast with most Black-Scholes derivations found in the pedagogical literature, this paper develops the fair option price from an economic equilibrium perspective. Through this approach, it is hoped the reader will comprehend both the mathematics and economics underlying option pricing theory, as both are equally important.

Keywords: Options Pricing, Black-Scholes Model, Stochastic Calculus, Pedagogy

JEL Classification: A22, A23, C02, G00, M19

Suggested Citation

Miller, Luke and Bertus, Mark, An Exposition on the Mathematics and Economics of Option Pricing (2013). Business Education & Accreditation, v. 5 (1) p. 1-16, Available at SSRN: https://ssrn.com/abstract=2155069

Luke Miller (Contact Author)

Saint Anselm College ( email )

100 Saint Anselm Drive
03102

Mark Bertus

Auburn University ( email )

415 W Magnolia
Lowder rm 303
Auburn, AL 36849
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
117
Abstract Views
597
rank
264,300
PlumX Metrics