Historical Background

Back in the early 1970s when options on U.S. stocks were first introduced, everyone was guessing as to how they should be priced. Clearly, the option price should be related to the underlying stock price, but beyond that things were vague. At the time, there were three men on the forefront of theoretical finance trying to solve this problem, namely Fischer Black, Myron Scholes, and Robert Merton.

The work of these men led to an important formula for the pricing of options. This result became known as the Black-Scholes formula, because it first appeared in a 1973 paper authored by Black and Scholes. Twenty-four years later, in 1997, Merton and Scholes were awarded the Nobel Prize in Economics for their groundbreaking work ...

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