The “Option Value Calculator"
Every investor and every MBA student will eventually
run into the problem of how to value a stock option. The former Director of the BYU MBA Program,
Craig Merrill, says that every MBA student must learn how to value a stock as
part of his or her MBA experience. More
importantly, however, Professor Merrill says that every MBA student must learn
how to value a stock using a binomial pricing model. But, there is more than one way to value an
option, including the use of the Black-Scholes formula, which complicates the
task.
I have taken several classes that required the
students to build either a Black-Scholes or a binomial model to price
options. These basic models have completed
the task at hand, but were clunky and did not allow for variable inputs. For example, often the models would not allow
the number of sub-periods before expiration to be altered. This is an important variable in any option
calculation. Moreover, these models
would only value a call or a put independently, but not both together for
comparison. In the end, these models were
hard to use and only spewed out limited data.
Most recently, Professor Thorley, of BYU’s
Finance Department, asked the students of his Investments class to build a
model that would value a European call option.
As a student of that class, I decided to take the project much further
and build a model using his template and VBA that would value both a put and
call option for the same stock. By
clicking on a single button, the “Option Value Calculator” will allow you to
enter the necessary inputs into a user form, and by clicking “okay”, the model
will automatically build out the binomial trees for both the call and put
option. The model will also generate the
put and call values using the Black-Scholes formula, allowing the user to
compare values for each method.
As a result of the model, the complex task of
pricing an option can be completed at the click of button.
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