The price of an option is the present value of the total probability weighted payoff. However, there are some discrepancies in the calculations when compared with the Black-Scholes method. These are outlined below for changes in spot/strike prices, interest rates, time to expiry and the volatility.
Key learning objectives:
What is the future probability distribution?
What is the volatility of the underlying asset?
How far away is the spot in relation to the strike, the forward price and the time to expiry?
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