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Black-Scholes options pricing model

In the world of financial markets, when you buy an ‘option’ on a corporate stock you are paying for the right, but not the obligation, to buy or sell an amount of that stock at a pre-specified price. How much should you pay for such an option? The Black-Scholes model provides you with an answer to that question.

When to use it

  • To calculate prices for buying or selling options in the financial markets.
  • To develop ‘hedging’ strategies if you work for a bank or hedge fund.
  • To work out what your stock options as an employee are worth.

Origins

In 1973, Fischer Black and Myron Scholes published a paper entitled ‘The pricing of options and corporate liabilities’, in the Journal of Political Economy. In that ...

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