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Technology Stocks : Cisco Systems, Inc. (CSCO)

CSCO 73.42

-2.4%

Jan 20 3:59 PM EST

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To: GVTucker who wrote (64053)	5/15/2003 11:04:11 AM
From: rkral	Read Replies (1) of 77400

OT ... GVTucker, re "Black Scholes does not estimate future values." I usually agree 100% with your posts .. but not this time. The Black-Scholes option value model is based on calculating the option value at expiration using known stock and exercise prices, and an estimate of the future price volatility of the stock. Mathematically, a log-normal probability density function of stock prices .. is multiplied by the profit/loss graph (profile) of the option at expiration .. and the result is integrated .. giving a mathematical equation for the expected option value at expiration. That equation is then modified to take both risk-free interest rates and dividends into consideration. Of course, estimates must be made here too. In applying the modified equation to employee stock options, a reduced option life (rather than the typical 10 years) is estimated. Regards, Ron

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