Definition
The Black-Scholes model is a mathematical formula for calculating the theoretical price of European-style options. It considers current stock price, strike price, time to expiration, risk-free rate, and volatility. While it has limitations (assumes constant volatility, no dividends), it revolutionized options trading.
Formula
C = S₀N(d₁) - Ke^(-rT)N(d₂)
Example
Using Black-Scholes with stock at $100, strike $105, 30 days, 5% rate, and 30% vol calculates a call worth about $2.50.
FAQ
What is Black-Scholes Model?
A mathematical model for pricing European options.
How do you calculate Black-Scholes Model?
A common formula for Black-Scholes Model is: C = S₀N(d₁) - Ke^(-rT)N(d₂)
Why is Black-Scholes Model important?
Black-Scholes Model helps investors evaluate options and make more informed decisions.