A Method for Teaching the Black-Scholes Option Pricing Model Using Excel

Abstract

One of the most important concepts in modern finance practice
and education is option pricing. The Black-Scholes model of
option pricing is possibly the most commonly-used model. This
paper presents an implementation of the Black-Scholes model of
option pricing that includes graphs of the option value, the
intrinsic value, and the time value. These graphs are dynamic,
allowing the user to change the value of the volatility of
underlying asset returns, time to maturity, and the risk-free rate.
The user can also see how price of an option changes with
movements in the underlying asset price. By illustrating both
option prices and the components of option prices (intrinsic and
time value) over a range of underlying asset prices, students can
more easily visualize the effects of the drivers of option prices.