Question

Please use sentences and a simple example to explain the Black Scholes formula for options.

Answer 1

Black scholes is a pricing model used to determine the fair price and theoretical value for a call or put option based on 6 variables such as volatility type of option underlining stock price time strike price and the risk free rate. The quantum of speculation is more in case of stock market derivatives and hence proper pricing of options eliminates the opportunity for any arbitrage . There are two important models for option pricing binomial model and black scholes this model is used to determine the price of a European call option with simply means that option can be exercised on the expiration date.Black scholes pricing model is largely used by option traders to buy options that are priced under the formula calculated value and sell options that are priced higher than the black scholes calculated value . The formula for computing option price is as under

Call option premium C =SN (d1) - Xe - rtN(d2)

Put option premium P = Xe - rTN (-d2) - SON (-d1)

The black Scholes equation is a partial differential equation governing the price evaluation of European call option put under the black Scholes model broadly speaking the term may refer to similar PDE that can be derived for a variety of options are more generally derivatives.

In the black Scholes model example the user has to input all the 5 variables the strike price stock price time volatility and risk free rate and click the get code to display results.