Session 9: Introduction to Option Valuation

In this session, I set up the process for valuing assets with cash flows contingent on something happening, and use that process to lay out the basics of option pricing models.
Slides: www.stern.nyu.edu/~adamodar/pd...
Post class test: www.stern.nyu.edu/~adamodar/pd...
Post class test solution: www.stern.nyu.edu/~adamodar/pd...

[@kashik1725]

Thanks Sir for the valuable stuff to make our life to njoy with the essense of finance.....

[@marcomorassut1500]

You should use the delta formula for explain Better how ti find the percentage of stock to buy

[@MachineLearning101]

Post class test solution link refers to the test, not the test solutions

[@preputuallearning3227]

Prof, I have 2 questions.
1. In binomial model, why have not you considered time factor t=2( assuming 2 months)?
2. An why are we considering the risk free rate of return for the same.
Thanks

[@Ms10year]

Thank you professon Damodaran for the great course! The test solution document is actually same as the question document. I got my answers as below: 1d, 2b, 3d, 4b, 5c, 6c, and would love to know if I get them right or not.

[@andrewgoulding]

If it makes you feel any better I got all of the same answers.

[@Raj-zp5iw]

The test solution has 3 pages, the solution is on the 3rd page. And your answers are correct.

[@Ms10year]

@@Raj-zp5iw Thank you!

[@nkn4240]

Even I got the same answers. But, in the solutions for the questions 5 and 6, though the answers are correct there are some minor substitution mistakes:
Q5. t =(3/12) years(in the soln mistakenly they have used 5)) in the second term:
50 x e^(-0.03 x (3/12) (/*instead of 5*/)) x 0.2778
Q6. r = 0.03 (in the soln they have used 0.05). So, the second term is:
-50e^(0.03(/* instead of 0.05*/) x 5) x 0.3152

[@zeze9062]

@@nkn4240 hey i was wondering if you could help me on q3, why does it says the strike price of 40 gives 35 cash flow. How'd we get to the cash flow?

[@danny100d]

Thank you…

[@farbodba]

Dr. Damodaran,
The post class test solution PDF is same as the post class test PDF. Would you please update this when you have a moment. Thank you!

[@luyandazanokuhle5953]

Under which condition you would buy or sell call option?

[@Raj-zp5iw]

The test solution has 3 pages, the solution is on the 3rd page.

[@zeze9062]

hey raj, would you mind helping me on q3, im stuck. Please and thank you.

[@zeze9062]

question 4**

[@EnairaJ]

H, how did you guys get D=0.8278 , B=21.61

[@lalaoepsi7572]

late response but you just calculate D and B via the formulas given above:
70D-1,11B = 33,96
35D-1,11B = 4,99
==> 70D -1,11B - (35D-1,11B) = 33,96 -4,99
Solve for D first and then you can find B

[@EnairaJ]

thank you@@lalaoepsi7572