Question

Write a one paragraph summary of the Black-Scholes formula and argue for or against “the most important equation in finance”. Here is a documentary to give you some more background info:

Http://documentary-movie.com/trillion-dollar-bet/

Answer 1

Black Scholes Model- It was developed in 1973 by Fisher Black and Myron Scholes. This model is used to determine the price of the options. This is considered one of the best ways for knowing the price of an option.

Elements of Black Scholes- Are as following:

1. Strike price of an option
2. Current stock price
3. Time to expiration
4. Volatility
5. Risk free rate

Assumptions in Black Scholes model: Are as following:

1. There is no dividend in options during the life of the options
2. No transaction cost
3. Options is European in style
4. Market is efficient
5. Return on the underlying is normally distributed

Formula: C = SN (d1) - N (d2) Ke^-rt

Black Scholes calculator is also available with the help of which, price can be known.

Advantage of Black Scholes model- This model saves time and you can calculate price of large number of options in very less span of time.

Limitations of Black Scholes model- It does not tell the accurate price of American style options.