O'Reilly logo

Key Financial Market Concepts, 2nd Edition by Bob Steiner

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

The Black and Scholes Pricing Model

Definition

The Black and Scholes model is a formula for calculating option prices, named after Fischer Black and Myron Scholes, who developed it.

How is it used?

The pricing of an option depends on probability. In principle, ignoring bid/offer spreads, the premium paid by the buyer should represent his expected profit on exercising the option. The profit arises from the fact that he is always entitled to exercise an option which expires in-the-money and simultaneously cover himself in the market at a better price. The buyer will never be obliged to exercise the option at a loss to himself. As with insurance premiums, assuming that the option writer can accurately assess the probability of each possible outcome, ...

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, interactive tutorials, and more.

Start Free Trial

No credit card required