FIN 3506 Lecture Notes - Lecture 10: Stochastic Differential Equation, Normal Distribution, Risk-Free Interest Rate
6 Oct 2016
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Learning objectives: understand the returns and distribution of stock returns and how they tie into the development of the black-scholes-merton options pricing model, understand the basic assumptions and the derivation of the black-scholes- American options with discrete dividends: apply the options pricing techniques to the a continuous payment of dividends. Stock price are log normally distributed due to the fact that the price of stock cannot fall below zero as a price. From the results in chapters that we have not covered the distribution of the stock price is lognormal. This is just a mathematical representation that the stock price at any time has a mean value of the first term ln s + For instance a stock that is currently trading at 100 per share and has an. Ts annual expected return of 10% and a volatility of 20%, the stock price should be.
