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 BlackScholesMerton Model.
INVESTOPEDIA EXPLAINS 'Black Scholes Model'
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.
There are a number of variants of the original BlackScholes model.
VIDEO

LatticeBased Model
An option pricing model that involves the construction of a binomial ... 
Stochastic Volatility  SV
A statistical method in mathematical finance in which volatility ... 
Alfred Nobel
The man after whom the Nobel Prize is named. Nobel, born in 1833 ... 
Myron S. Scholes
An American economist and winner of the 1997 Nobel Prize in Economics ... 
Black's Model
A variation of the popular BlackScholes options pricing model ... 
Black Box Model
A computer program into which users enter information and the ...

What technical skills must one possess to trade options?
An option is a financial derivative that gives you (as the buyer or holder) the right to buy or sell an underlying security ... Read Full Answer >> 
What is an option's implied volatility and how is it calculated?
Implied volatility is a parameter part of an option pricing model, such as the BlackScholes model, that gives the market ... Read Full Answer >> 
What is the variance/covariance matrix or parametric method in Value at Risk (VaR)?
The parametric method, also known as the variancecovariance method, is a risk management technique for calculating the value ... Read Full Answer >> 
What is backtesting in Value at Risk (VaR)?
The value at risk is a statistical risk management technique that monitors and quantifies the risk level associated with ... Read Full Answer >> 
How much variance should an investor have in an indexed fund?
An investor should have as much variance in an indexed fund as he is comfortable with. Variance is the measure of the spread ... Read Full Answer >> 
What options strategies are best suited for investing in the aerospace sector?
The best options strategies for investing in the aerospace sector exploit the sector's volatility and propensity for big ... Read Full Answer >>

Investing
Understanding the BlackScholes Model
The BlackScholes model is a mathematical model of a financial market. From it, the BlackScholes formula was derived. The introduction of the formula in 1973 by three economists led to rapid ... 
Options & Futures
Breaking Down The Binomial Model To Value An Option
Find out how to carve your way into this valuation model niche. 
Options & Futures
How Risk Free Is The RiskFree Rate Of Return?
This rate is rarely questioned  unless the economy falls into disarray. 
Investing Basics
Pin Down Stock Price With Real Options
How can you assign a value to what a company may do with its business in the future? We explain how it works. 
Options & Futures
Options Basics Tutorial
Discover the world of options, from primary concepts to how options work and why you might use them. 
Options & Futures
Understanding Option Pricing
Take advantage of stock movements by getting to know these derivatives. 
Bonds & Fixed Income
Accounting and Valuing Employee Stock Options
Learn the different accounting and valuation treatments of ESOs, and discover the best ways to incorporate these techniques into your analysis of stock. 
Fundamental Analysis
Explaining Expected Return
The expected return is a tool used to determine whether or not an investment has a positive or negative average net outcome. 
Economics
Understanding the Fisher Effect
The Fisher effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate. 
Fundamental Analysis
Explaining the Geometric Mean
The average of a set of products, the calculation of which is commonly used to determine the performance results of an investment or portfolio.