Black Scholes Model

Nick Name
Black Scholes Merton
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:

  1. The option is European and can only be exercised at expiration.
  2. No dividends are paid out during the life of the option.
  3. Markets are efficient (i.e., Market movements cannot be predicted).
  4. There are no transaction costs in buying the option.
  5. The risk-free rate and volatility of the underlying are known and constant.
  6. The returns on the underlying are normally distributed.