Economics, Econometrics and Finance
4 years ago

New method simplifies Black-Scholes option pricing model for undergraduates.

arXiv (Cornell University)
A derivation of the Black-Scholes option pricing model using a central limit theorem argument
Rajeshwari Majumdar, Phanuel Mariano, Lowen Peng, Anthony Sisti

Paper Summary

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The Black-Scholes model is a way to estimate the price of European options. It uses a formula that describes how prices change over time. The usual way to figure out this formula is too complicated for most students. But, a new method has been found using a central limit theorem. This new way is simpler and can be understood by undergraduates studying probability.