Abstract
This paper reviews the form of the Louis Bachelier model for the modern option contract. This enables basic model properties to be analysed and the model’s key elements to be defined being the intrinsic value and the instability or option risk premium. Further the paper reviews the option contract value, vis-a-vis the option contract premium or price, and based on this defines certain rational expectations propositions to demonstrate its operation. The purpose is to provide the groundwork for applying this form of option model to other financial questions, briefly addressed in this paper.
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