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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: Stock Farmer who wrote (64058)	5/15/2003 11:44:59 AM
From: GVTucker	Read Replies (2) of 77400

It does this by estimating the expected future difference between strike and market price at time of exercise and discounting this back to present. One more important factor needs to be added. Black Scholes also calculates a probability of a stock having an intrinsic value at the time of exercise by incorporating the stock's volatility into the equation. And THAT is why Black Scholes does not predict an option's value. Because volatility cuts both ways, there is a probability implicit in the current price of the option that the intrinsic value of the option will be zero at expiration.

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