1. Simple Heuristics on the Black-Scholes Option Pricing Model Rossitsa Yalamova University of Lethbridge

2. Objective and Goal Develop passion for creative solution and intuition of the variables relationships in the model Develop instructional design and educational technology for the foundations of derivative valuation and the basic principles of risk management and hedging.

3. Problem Solving Algorithms do not necessarily lead to comprehension but promise a solution, while heuristics are understood but do not always guarantee solutions. PDE for the solution of the BSOPM

4. The Black-Scholes model:

5. Concrete example technique Option at the money (S=K) risk free rate is 0:

6. Option at the money (S=K); R=0 T=1; σ=0.8

7. (S=K); risk free rate positive Risk free rate moves the area to the right by and increases the value as K is discounted

8. Adding positive instantaneous return (S>K) The moves to the right by

9. Option “out-of-the-money”; r=0 The area moves to the left by

10. Option “out-of-the-money”; r>0

11. Implied volatility

12. Volatility Smiles

13. Portfolio Insurance Protective put  S=56; P=2.38, K=50  Short position in the stock and long in the risk free asset  W s =SN(d1)/(S+P)