Black Scholes Model
Nick Name
Black Scholes Merton
Abbreviation
BSM
The Black Scholes Model won the Nobel prize in economics for its use in price change over a period of time of financial instruments such as stocks that can, amongst other things, be utilized to ascertain the price of a European call option. This model was the first widely used model for option pricing.
The Black-Scholes model makes certain assumptions:
- The option is European and can only be exercised at expiration.
- No dividends are paid out during the life of the option.
- Markets are efficient (i.e., Market movements cannot be predicted).
- There are no transaction costs in buying the option.
- The risk-free rate and volatility of the underlying are known and constant.
- The returns on the underlying are normally distributed.
