Can someone explain me, how to do black scholes option pricing model?
Confuse bruh..
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Troll?
Read a book
At a high level, you are just plugging in numbers to come up with the price of an options contract given a bunch of variables
It estimates the price by creating a "portfolio" of other securities to mimick the options contracts risk (standard deviation) and expected return and finding the implied price based off those assets
I dont know why you'd ever need Black Scholes as an investment banker though
It’s more so used to value investments with multiple convertible securities in the cap stack. Nothing a banker will need but can be helpful to know if you’re in growth equity or a valuation firm. Basically you find the seniority, liquidation and conversion prices for each convertible security and allocate equity value based off of the various “breakpoints” Ex: Breakpoint 1: Liq pref for series C @1.5x Liq preferred Breakpoint 2: Liq pref for series A and B @1.00x Liq pref
Breakpoint 3: participation of common until $1.50 (the price at which series a converts)
Breakpoint 4: Conversion of series A, etc etc. You then run a BS formula on each of the breakpoints.
It is very theoretical and I’ve done maybe 400 of them and it honestly has no real application other than the fact that it’s generally accepted to use for fair value purposes
TMT bankers definitely should know this stuff. There are so many convertible securities out there. Whether you’re negotiating a convert as part of a deal or raising capital for a client, this definitely comes up. Maybe not as often, but I’ve had to do Black-Scholes a handful of times to value converts.
But yeah you literally just look up the formula and plug stuff in lol. The inputs are the hard part (i.e., what to use for volatility), but the other stuff isn’t that hard.
Agreed. Especially since most growth equity is tech. I was more so referring to an equity allocation model which is a little more nuanced
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