Stochastic Calculus and the Black-Scholes-Merton Model: A Simplified Approach

TL;DR

This paper clarifies the role of the expected asset return in the Black-Scholes-Merton model, challenging previous claims of its irrelevance.

Contribution

It provides a simplified analysis demonstrating that the expected return influences option pricing, countering common misconceptions.

Findings

Expected return affects option prices in the Black-Scholes-Merton model.

The paper refutes the claim that expected return has no role.

A simplified approach clarifies the model's assumptions.

Abstract

This paper refutes the claim that the expected rate of return of the underlying asset plays no role in the Black-Scholes-Merton option pricing model.