Derive the Black-Scholes formula to represent the relationship between the price of an option and the price of its underlying stock
Let C be the value of a call option, with
S = current price of the underlying stock
K = the strike price
ln = natural logarithm [to base e]
r = interest rate
T = time to expiration
? = standard deviation of returns on underlying stock
N1(d1) and N2(d2) = cumulative standard normal distribution functions.
Then,
C = SN(d1) - Ke-rTN(d2),
With
d1 = ln(S/K) + [(R + ?2?2??? ? ??T and d2 = d1 - ??T
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When deriving the production possibilities curve, it is assumed that
A) the amount of each good that is to be produced is fixed. B) the prices of resources are fixed along the curve. C) most resources can be used to produce only one good. D) resources are efficiently used.
In which of the following markets adverse selection may not occur?
a. The market for pre-owned residential apartments b. The lemons market c. The market for new sports utility vehicles d. The capital market e. The market for health insurance