# Black-Scholes formula

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Forbes  May 15  Comment
The World Economic Forum hosts “mini-Davoses” around the world, and last week was Africa’s turn as the good and the great of the continent and allied well-wishers gathered for three days in Cape Town to reflect on recent achievements and...
Forbes  Feb 13  Comment
This is a slightly unfortunate thing for a retired professor of mathematics to say. Especially as he's said it in a book just being published. For the thing is that the Black-Scholes equation didn't cause the financial crash. Had almost nothing to...
Investment U  Aug 31  Comment
Options Pricing: Use the Black-Scholes Model to Get a Fair Price for Your Options by Karim Rahemtulla, Options Expert Tuesday, August 31, 2010: Issue #1335 Picture the scene… You’ve just spent several hours researching a company that...
Fundamental insights and ideas  May 8  Comment
Paul Wilmott had an interesting post last week about his tryst with the Black Scholes option pricing model. On how his opinion of the model has changed with time and experience. I had gone from a naïve belief in Black-Scholes with all its...
In a fascinating article, Inside Wall Street's Black Hole, Michael Lewis bestselling author of Liar's Poker, discusses the flaws in the Black-Scholes theory. Its a must read. Here are some excerpts: ...The striking thing about the seemingly...

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The Black-Scholes formula is the result obtained by solving the partial differential equation that must be satisfied within the Black-Scholes model of an equity's price. The formula gives the price of a European call option by taking into account the price of the underlying stock, the volatility of the underlying, the time value of money, and the time remaining before the option expires. The price for a corresponding European put option can be derived from the solution to the Black-Scholes formula using put-call parity. Also, the Greeks are calculated from this model. The Black-Scholes model of an equity's price, on which the formula is based, assumes that an equity's price follows a geometric Brownian motion with a constant drift and constant volatility.

The Black-Scholes model for option pricing was first published by Robert C. Merton in 1973. Merton's model expanded on the previous work of Fischer Black and Myron Scholes. The Black-Scholes model/formula is still widely used for computing fair option prices today and for their achievement Merton and Scholes won the Nobel Prize in Economics in 1997. Fischer Black was officially recognized as a contributor to the work as he was ineligible to receive the prize on account of his death in 1995.