AFMP4

Syllabus B2. Application Of Option Pricing Theory In Investment Decisions 5 / 17

a) Apply the Black-Scholes Option Pricing (BSOP) model to financial product valuation and to asset valuation:
i) Determine and discuss, using published data, the five principal drivers of option value (value of the underlying, exercise price, time to expiry, volatility and the risk- free rate)
ii) Discuss the underlying assumptions, structure, application and limitations of the BSOP model.

b) Evaluate embedded real options within a project, classifying them into one of the real option archetypes.

c) Assess, calculate and advise on the value of options to delay, expand, redeploy and withdraw using the BSOP model.
Application Of Option Pricing Theory In Investment Decisions