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To: rkral who wrote (119026)	5/21/2002 12:19:25 AM
From: Stock Farmer	Read Replies (1) \| Respond to of 152472

Ron: Re computing the value of an option: It can be valued using the "fair value method" of FASB SFAS 123, which does use a Black-Scholes variant. The "fair value method" does not try to predict the future value of the option Nope, doesn't try to predict anything. Just estimate what we expect it will be <ggg> These models all hinge on what is called "volatility" which is the standard deviation of how far the stock *moves in a period of time (year). If it moves $1 then the option gains value $1. If it moves $2 then the option gains value $2. Because the strike price is fixed. The idea here is that there's a distribution of probabilities of having moved $0, $1, $2, $3... $93, $94, ... $172,451 ... and so on from the strike price, and the expected (not predicted!) value is the weighted sum of all of these possible values. Various models differ in how this probability distribution is computed, and other considerations. For example, Black-Scholes value of an option is given by p N(d1) - s exp(-rt) N(d2) with d1 = [ln(p/s) - (r + sqr(v)/2) t ] / [ v sqrt(t) ] d2 = d1 - v sqrt(t) Where N is cumulative normal density function p = current price s = strike price t = time remaining through expiration, expressed as % of a year r = risk free interest rate v = volatility measured by annual standard deviation ln = natural logarithm exp(x) = e raised to the power x sqrt(x)= square root of x sqr(x) = square of x If you are really interested in the roots of detailed theory, try looking up an article entitled "Fact and Fantasy in the Use of Options" by Fisher Black, published in Financial Analysts Journal, July-August '75, pp 36-70 John.