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Igor

Black Scholes Model Definition

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The Black-Scholes option pricing model is an example of a gamma pricing model which is usually applied to a stock option to determine its value, using the price variation of the stock, the time value of money, the strike price and expiry time of the option and the time value.

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DEFINITION OF 'BLACK SCHOLES MODEL'

A model of price variation over time of financial instruments such as stocks that can, among other things, be used to determine the price of a European call option. The model assumes that the price of heavily traded assets follow a geometric Brownian motion with constant drift and volatility. When applied to a stock option, the model incorporates the constant price variation of the stock, the time value of money, the option's strike price and the time to the option's expiry.

 

Also known as the Black-Scholes-Merton Model.

 

In other words:-

 

The Black Scholes Model is one of the most important concepts in modern financial theory. It was developed in 1973 by Fisher Black, Robert Merton and Myron Scholes and is still widely used today, and regarded as one of the best ways of determining fair prices of options.

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