Question

Hi all,

in their paper "European Real Options: An intuitive algorithm for the Black and Scholes Formula" Datar and Mathews provide a proof in the appendix on page 50, which is not really clear to me. It's meant to show the equivalence of their formula $E_{o}(max(s_{T}e^{-\mu T}-xe^{-rT},0))$ and Black and Scholes.

They refer to Hull(2000), define $y=s_{T}e^{-\mu T}$, and then do the following transformation:

$E_{o}(max(s_{T}e^{-\mu T}-xe^{-rT},0))$ $=\intop_{-xe^{-rT}}^{\infty}(s_{T}*e^{-\mu T})g(y)dy$ $=E(s_{T}e^{-\mu T})N_{d_{1}}-xe^{-rT}N_{d_{2}}$

Could anybody help me out?

Thanks in advance.

Corn

Answer 1

Thanks. I moved the topic to http://quant.stackexchange.com/questions/1148/better-understanding-of-the-datar-mathews-method-real-option-pricing .