cafeconomics

There are two kinds of people on this planet. Mathematicians who may constitute 0.001% (or even lesser than that!) of the total population and the other lesser mortals. So if you are one of those lesser mortals (like me!) and you want to use the Black Scholes model then, this article is for you. This article is based on Prof. Damodaran's real options pricing theory. To understand Black Scholes without delving too much into calculus, one needs to the understand two concepts - a) replication portfolio and b) arbitrage. To value or price an option we replicate the cash flows from the option by using other financial instruments as described below. Call = Borrowing + Buying D of the Underlying Asset Put = Selling Short D on Underlying Asset + Lending To replicate the cash flows on a call option without actually buying the option, we need to borrow some money (put in some personal equity) and buy D units of underlying asset. At the end of the time period if the stock price goes up you...

1. Data Source : The data sets for this article have been sourced from moneycontrol.com (open to everyone) It looks like moneycontrol.com updates its data every day at 1930 hrs. As the earnings season progresses more numbers will get updated but most of the earnings numbers should belong to 2019. (GIGO - the quality of outputs is subject to the quality of inputs) 2. Consistency and Timing: Multiples approach to valuation is subject to whims and fancies of the analysts. For example, PE ratio which is the most widely used multiple across the global financial markets can have many variations within the rules of the game. Although price is the current market price most of the time, earnings can be previous years earnings or trailing twelve month earnings or forward earnings. An analyst who is bearish on the stock may use past earnings while an analyst who is bullish on the stock may use forward earnings. Even the price used can be the current price, weekly or monthly average or a moving a...