The impact of portfolio re-financing on Black–Scholes call option valuation

Cokki Versluis and Tom Hillegers

Applied Financial Economics Letters, 2006, vol. 2, issue 4, 261-263

Abstract: The theory of Black and Scholes is the basis for all contemporary financial option valuation methods. It is based on the change in value of a portfolio consisting of stocks and options on those stocks in a short time interval, at the end of which the portfolio is renewed. The money value of portfolio renewal is ignored in the Black–Scholes theory. If the cost of portfolio re-financing is included in the Black–Scholes methodology, this leads to a closed form formula for the value of a European call option. In contrast to the outcome of the original Black–Scholes theory, this formula includes the price drift of the underlying asset.

Date: 2006
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DOI: 10.1080/17446540500447637

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