Quantitative Finance

Chapter 4

The Black/Scholes world

Financial engineers have at their disposal a set of mathematical “power tools,” which came into standard use for option pricing in the wake of the seminal papers of Black and Scholes (1973) and Merton (1973b), though these techniques were known well previously to mathematicians, theorists and practitioners in the physical sciences. These methods will be discussed and used here mainly within the original Black/Scholes framework, which for a large range of applications still remains the dominant paradigm. However, it should be noted that they are equally applicable, albeit often at a considerably higher level of technical complexity, in the many extensions, generalisations and modifications of the model that have ...