Black and Scholes Model

Black Scholes Model

A model for mathematically pricing options. The model takes into account the strike price, the time until the expiration date, the price of the underlying asset, and the standard deviation of the underlying asset's return. The model assumes that the option can only be exercised on the expiration date, that it will provide a risk-free return, and that the volatility of the underlying asset will remain constant throughout the life of the contract. The calculation is slightly different for calls and puts. See also: Option Adjusted Spread, Option Pricing Curve.

Black and Scholes Model

A relatively complicated mathematical formula for valuing stock options. The Black and Scholes Model is used in options pricing to determine whether a particular option should be selling at a price other than the one at which it currently trades.
References in periodicals archive ?
However, it has been observed from previous researches that Black and Scholes model is reasonably efficient in explaining the option prices in several countries markets (Latane and Rendleman 1976; Mac B eth and Merville 1979; Manaster and Rendleman, 1982).
The pricing efficiency of options market can be stated to be prevailing, when there is no significant deviation exists between the theoretical option prices obtained from the Black and Scholes model and the observed market prices of the options.
The pricing efficiency of options market can be stated to be prevailing, when there is no significant deviation exists between the theoretical option price obtained from Black and Scholes model and the observed market price of the options.
The Black and Scholes model is used to calculate the theoretical value of an option by utilizing five factors that affect the price of a stock option.
His topics include stochastic processes, numerical methods, European option pricing, and pricing outside the standard Black and Scholes model.
Development of the Black and Scholes model was based on a number of assumptions.
While the well known Black-Scholes option pricing model has been shown to provide good estimations of option prices overall (See Black and Scholes, 1972, Galai 1977 and 1978), Macbeth and Merville (1979) and Rubenstein (1985) show that the Black and Scholes model miss prices deep out of the money options.
This further suggests that the problem can be corrected by altering the distributional assumptions utilized in the Black and Scholes model.
The Black and Scholes model uses the risk-free rate to represent this constant and known rate.
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