Black Scholes Model

Dominique Trual Molintas

MPRA Paper from University Library of Munich, Germany

Abstract: Black-Scholes is a pricing model applied as the reference in the derivation of fair price—or the theoretical value for a call or a put option. A call is defined as the decision to buy actual stock at a set price, defined as the strike price; and by a scheduled expiration date. A put option is defined as the opportunity contract providing the owner the right but not the obligation, to sell an exact amount of underlying security at a stated price within a specific time frame. The call or put option in the Black Scholes model is based on six variables: strike price and underlying stock price, time and type of option, volatility and risk-free rate. The application of the model assumes that these stock or securities recognise its corresponding custom derivatives held to expiration. It is sufficient to state that the Black-Scholes treats a call option as an informal agreement defined as a forward contract with expectation to deliver stock at a contractual price, otherwise indicative in the strike price. Typically the Black-Scholes model is utilised to price European options (y p) that represents investment options in a selection of financial assets earning risk-free interest rates. In strictness, the model presents the option price as a function of stock price volatility: High volatility is tantamount a high premium price on the option.

Keywords: Black-Scholes model; strike price; volatility; risk-free rate; stock price volatility (search for similar items in EconPapers)
JEL-codes: E47 G12 (search for similar items in EconPapers)
Date: 2021-04-17
New Economics Papers: this item is included in nep-cwa, nep-ore and nep-rmg
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