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This note discusses the Black-Scholes option-pricing model and then applies the model to call options. The underlying logic of the model is emphasized and illustrated through the use of simple examples. The model is then applied using real data. The note pays particular attention to procedures for estimating the potential for stock-price changes (volatility). It also provides the reader with an appreciation of the economic underpinnings of the model as well as the ability to apply the model to real data.

This note provides an overview of techniques used to value assets, including multiples, arbitrage pricing, and discounted cash flow. The note emphasizes the basic nature of valuation approaches and their logical underpinning, focusing on how techniques are applied to assets that are or might be traded in financial markets. The note sets the stage for specific (and often complicated) applications of the pricing techniques.

This note is a brief introduction to the logic and practice of using stock options to compensate executives. The Black-Scholes option-pricing model is used to estimate the value of option grants for a company. The note affords the opportunity to apply options valuation in the context of executive compensation, and serves as a companion to introductions to options that expose the reader to the Black-Scholes option-pricing model.

This note examines how spot and forward interest rates relate to bond prices and to each other. After defining spot and forward rates, the note shows how to estimate spot rates from data on either zero-coupon bonds or coupon bonds. It also shows how to express these stated rates for different compounding assumptions. The note pays particular attention to understanding how arbitrage forces in markets establish the links between forward and spot rates and how to infer one set of rates from the other. The note deepens understanding of bond pricing, assuming that the reader is already familiar with the basics of present-value techniques. It is a useful springboard for topics (e.g., swaps) that require familiarity with spot and forward rates.

This note shows how dividend payments affect option values owing to the effects of dividend payments on share price and resulting investor behavior. In addition to discussing the underlying logic, the note shows how to value options for dividend-paying stocks by adapting the Black-Scholes option-pricing model. The note addresses issues of early exercise and the underlying incentives of investors who own call or put options.

This note introduces options (both calls and puts) and their valuation. After covering the history of options and the basic nature of their payoffs, the note provides an intuitive discussion of the determinants of an option's value. The note then introduces and applies the Black-Scholes option-pricing model to real data, using an Excel-based version of the model. Throughout, the emphasis is on the basics of options and their valuation.

Using examples from financial markets, this note examines links among market prices, stated interest rates, and compounding assumptions. The note emphasizes how interest rates are expressions of market prices, and pays particular attention to the role of compounding assumptions. Market prices are converted into stated interest rates for different compounding assumptions. Guidance is offered on how to make intelligent comparisons across markets that use different compounding conventions. The note is useful as background for the study of a wide array of pricing issues in fixed-income and options markets.

In July 2001, a new CEO joins this small manufacturer of CD-ROMs and DVDs to discover that the firm is in the midst of a financial crisis induced by rapid growth. The CEO asks an analyst for help with five tasks: (1) review historical performance of the firm; (2) forecast financing requirements for the next two years; (3) exercise the forecasting model to identify "key driver" assumptions; (4) estimate Star River's weighted average cost of capital; and (5) analyze a proposed investment in a packaging machine. The analyst must offer insights and recommendations based on the work.

Student spreadsheet for case UV0014.

Students assume the role of adviser to Anita Roddick, the managing director of The Body Shop, and prepare a three-year forecast of the firm's income statement and balance sheet. Introduces percentage-of-sales forecasting, and walks students through the preparation of a simplified forecast, first using pencil and paper, then a spreadsheet program on a personal computer. Emphasizes the importance of being able to talk plainly about one's financial forecast and the insights that are of use to the general manager.

This case examines the capital budgeting framework used in a large specialty chemical company. It presents the reader with issues related to using multiple discount rates to examine projects and how compensation policies can impact on managerial actions. A second use of the case is to introduce project-related real options.

This note provides a detailed explanation of how to apply the equity residual valuation method when the debt/equity mix is changing. An example is provided that works through levering betas. The note can be used to accompany cases on leveraged buyouts.

The price of a bond is a function of the promised payments and the market-required rate of return. Because the promised payments are fixed, bond prices change in response to changes in the market-required rate of return. For investors who hold bonds, the issue of how sensitive a bond's price is to changes in the required rate of return is important. There are four measures of bond-price sensitivity that are commonly used: Simple Maturity, Macaulay Duration (effective maturity), Modified Duration, and Convexity. Each of these measures provides a more exact description of how a bond price changes relative to changes in the required rate of return.

The purpose of the case is to provide an opportunity for students to evaluate the relative performance of portfolios. In the case, students are asked to select one portfolio from among eight possible choices. Here the selected portfolio will be included in a larger pan-European portfolio. This a good application of the Sharpe, Treynor and Jensen indexes in an international setting. It can be used to draw clear distinctions about when each of the different performance measures should be used. In addition to the performance evaluation, students must also ask how each of the candidate portfolios fit into the overall objectives of the larger portfolio. This case can be used in a portfolio management class to introduce the different performance measures.

This brief note explains how to set up a Monte Carlo simulation using @Risk for the purpose of valuing options. It should be used in conjunction with the Excel spreadsheet Monte.xls.

This note takes students step by step through the evaluation of an interest rate swap. It assumes students have a strong grounding in the concepts of forward rates and spot rates.

This case allows students' to exercise their abilities in financial forecasting and analysis, and capital projects analysis. It offers a good omnibus review of foundational tools and concepts. In August 1993, a new CEO joins this small manufacturer of compact disks to discover that the firm is in the midst of a financial crisis, induced by rapid growth. The CEO asks an analyst for help with five tasks: (1) review historical performance of the firm; (2) forecast financing requirements for the next two years; (3) exercise the forecasting model to identify key-driver assumptions; (4) estimate Astral's weighted-average cost of capital; and (5) analyze a proposed investment in a packaging machine. The student in the role of the analyst must offer insights and recommendations based on the work.