Geometric Brownian Motion, Option Pricing, and Simulation: Some Spreadsheet-Based Exercises in Financial Modeling

• Main Authors: Kevin D. Brewer, Yi Feng, Clarence C. Y. Kwan
• Format: Article
• Language: English
• Published: Bond University 2012-11-01
• Series: Spreadsheets in Education
• Subjects: Stochastic process; geometric Brownian motion; Black-Scholes model; put-call parity; simulation
• Online Access: http://epublications.bond.edu.au/ejsie/vol5/iss3/4

This paper presents some Excel-based simulation exercises that are suitable for use in financial modeling courses. Such exercises are based on a stochastic process of stock price movements, called geometric Brownian motion, that underlies the derivation of the Black-Scholes option pricing model. Guidance is provided in assigning appropriate values of the drift parameter in the stochastic process for such exercises. Some further simulation exercises are also suggested. As the analytical underpinning of the materials involved is provided, this paper is expected to be of interest also to instructors and students of investment courses.