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Inputs to the Black-Scholes-Merton model – A premiere on IFRS 2 Valuation

The Black-Scholes-Merton model is a mathematical model for valuing financial derivatives such as stock options. The fair value of the option is determined by the model using several inputs. In the context of IFRS 2 Valuation, several critical pieces of information to the Black-Scholes-Merton model are relevant.

The first input is the current stock price, which represents the current market value of the underlying asset. The exercise price, or the price at which the option may be exercised, serves as the second input. The third input is the time to expiration, which is the time remaining until the option expires. The fourth input is the risk-free rate, the interest rate on a risk-free investment, such as a government bond.

Another critical input is the expected volatility of the underlying asset, which measures the degree of fluctuation in the stock price. This input can be challenging to estimate, and different methods can be used to determine it.

The projected dividend per share is divided by the stock price at the calculation time to arrive at the dividend yield. This input is relevant for options on stocks that pay dividends and can significantly impact the option’s fair value.

Overall, understanding the inputs to the Black-Scholes-Merton model is crucial for valuing financial derivatives such as stock options, particularly in the context of IFRS 2 Valuation. Properly determining these inputs can help ensure that the fair value of the option is accurately reflected in financial statements.

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