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Hi,
Can somebody help me understand what “e” is in the Black-Scholes formulae. The BPP text book says it is “the base of the natural logarithms” but does not tell how to calculate it.
In the answers to questions in the text there is no further explanation on what it is or how it is calculated.
Many thanks
Kevin
I might be wrong but as far as I remember the purpose of e is to “discount”. i.e take account of time value of money. And I don’t think you need to know how to calculate e, all you have to do is put those digits in calculator ( e^t*s)
sameed is correct – it is to do with discounting over a continuous period (and for the exam is only ever relevant in the Black Scholes formula).
It is a constant (like ‘pi’ is). You certainly do not need to be able to calculate it, but you must have a scientific calculator for the P4 exam, and it will have an ‘e’ button on it (just as it will have a ‘pi’ button, although you do not need ‘pi’ 🙂 )
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