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Copyright 1999 President and Fellows of Harvard College

Black-Scholes Option Calculator

INTRODUCTION

Contents Introduction Valuation Inputs Valuation Outputs Implied Volatility

This sheet Input area for Black-Scholes Option Premia and "Greeks" Calculator Results sheet for Black-Scholes Option Premia and "Greeks" Calculator Calculate Implied Volatility Using Excel's Goal Seek and Put/Call Premia

Directions This workbook contains two functional sections, "Valuation" and "Implied Volatility," described below. Valuation -- Calculate Option Premia and Other "Greeks" using Black-Scholes Model This spreadsheet uses the Black-Scholes option pricing formula to value European calls and puts. To value an option, enter the following information in the gray cells: Unadjusted stock price: the current stock price. Annual dividend yield: the expected annual dividend as a percentage of current stock price. (For European options on stocks paying discrete dividends, enter as the "unadjusted stock price" the current stock price less the present value of the certain discrete dividends to be paid over the life of the option, and leave the "dividend yield" cell equal to zero. However, the "Greeks" will not be calculated correctly in this situation.) Exercise price: the strike or exercise price of the option Risk-free rate: the yield on a zero-coupon instrument with a maturity equal to the maturity of the option. Specify the compounding frequency assumed by this interest rate. Time to expiration (years): the time until the option expires, in years. You can use the box underneath the primary input area to convert a start and end date into a maturity in years. Volatility: the volatility of the underlying stock, expressed on an annualized basis. The model will display the adjusted stock price (the current stock price adjusted for the effect of dividends), the option premium, delta, gamma, rho, theta, and vega, as well as the intermediate calculations of d1, d2, and N(d1). For explanations of these variables, see John C. Hull, Introduction to Futures & Options Markets (NJ: Prentice-Hall, 1995), ch. 11, 14. Implied Volatility -- Calculate Implied Volatility using Black-Scholes Model This spreadsheet uses the Black-Scholes option pricing formula to calculate the implied volatility of an underlying stock based on the market valuation of European calls or puts on the stock. Enter the same information as for the "Valuation" spreadsheet, except instead of entering volatility, enter either the call or the put premium. Then click the appropriate button on the right side of the screen, and the model will calculate the implied volatility based on your inputs.

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HBS Menu Show/Hide Sample Data: Show Calculator: Show/Hide Celltips: Print Sheet with Celltips: Set Zoom: Visit Web Links: About HBS Toolkit:

Launches Windows calculator Toggles in/out red Celltips in documented cells Prints Celltip documentation on current sheet Provides quick access to 80%, 100%, and 125% zoom levels Links to HBS Toolkit website, Toolkit Glossary, and Toolkit Feedback, as well as HBS and HBS Publishing web sites Launches the about box for the HBS Toolkit

Harvard Business School, Case Software 2-296-704 This worksheet was prepared by Professor Peter Tufano and Research Associate Cameron Poetzscher as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright 1996, 1999 President and Fellows of Harvard College

Black Scholes Option Calculator

VALUATION INPUTS

Calculator inputs Stock price Annual Dividend Yield (D/P) Adjusted stock price Strike price Risk Free Rate
Compounding interval

Black Scholes Calculations $18.52 8.25% $18.330 $18.00 10.00% Option premium Option delta Call $0.794 0.6856 European style Put $0.242 -0.3042

Time to expiration (years) Volatility (annualized)

0.13 18.0%

Option rho Option theta

1.55 -1.74 For Call or Put

-0.76 -1.49

Gamma Vega

0.2894 2.3228

d1 d2 N'(d1)

0.5034 0.4385 0.3515

Time to expiration calculator Start Date End Date Years 03/27/13 05/15/13 0.13

Copyright 1996, 1999 President and Fellows of Harvard College

F15: F17: F19: H19: F21: H21: F23: F27: H27: F29: H29: H33: J33: H35: J35: J37: E41:

The current price of the stock. The dividend yield calculated as annual dividends paid divided by current share price. The stock price adjusted for any dividends that are expected to be paid between now and the maturity of the option. The "fair value" price of the option, as calculated by the model, given the assumptions. Also called the Strike Price, this is the share price at which the holder of an option is able to buy (with a call) or to sell (with a put) the underlying security. The change in option value (in dollars) when the stock price increases by $1 Enter interest rate with periodic compounding. The equivalent continuously compounded interest rate will be used in the subsequent calculations. The number of years until the option expires or matures. The change in option value (in cents) when interest rates increase by 1% Annualized standard deviation of stock price returns. The change in option value when time to expiration decreasesby 1 year. How much the option delta changes when the stock price increases by $1. An intermediate calculation. The change in option value (in cents) when volatility increases by 1%. An intermediate calculation. An intermediate calculation. Use this box to calculate the time to expiration, then enter the result above.

Black Scholes Option Calculator

IMPLIED VOLATILITY

Calculator inputs Stock price Annual Dividend Yield (D/P) Market price of call Risk-free rate Compounding frequency $18.53 8.25% $0.81 10.00% Time to expiration (years) 0.13 Adjusted stock price Exercise price Market price of put $18.34 $18.00 $7.10

Implied Volatility (Sigma) Intermediate Solver Calculations d1 Call premium 0.5192 $0.81

18.1%

d2 Put Premium

0.4540 $0.24

Copyright 1996, 1999 President and Fellows of Harvard College

G15: K15: K17: G19: K19: G21: K23: I32: G36: K36:

The current price of the stock. The stock price adjusted for any dividends that are expected to be paid between now and the maturity of the option. Also called the Strike Price, this is the share price at which the holder of an option is able to buy (with a call) or to sell (with a put) the underlying security. This is the price of the call as quoted in the market. This is the price of the put as quoted in the market. Enter interest rate with periodic compounding. The equivalent continuously compounded interest rate will be used in the subsequent calculations. The number of years until the option expires or matures. The implied volatility is the annualized volatility that matches the Black-Scholes "fair value" price with the observed price offered by the market. An intermediate calculation. An intermediate calculation.

sample1

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sample1

100 0.05 11.73 0.1 100 7.1

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