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The Black-Scholes model is a mathematical model of a financial market. From it, the Black-Scholes formula was derived. The introduction of the formula in 1973 by three economists led to rapid growth in options trading.

This formula is widely used in global financial markets by traders and investors to calculate the theoretical price of European options, a type of financial security. These options can only be exercised at expiration.

The formula has been demonstrated to yield prices very close to the observed market prices.

The Black-Scholes formula requires complex mathematics. Fortunately, traders and investors who use it do not need to do the math. They can simply plug the required inputs into a financial calculator.

The necessary inputs are:

- the underlying stock's price

- the option's strike price

- time to the option's expiry

- volatility of the stock

- time value of money (or risk free interest rate)

The Black-Scholes model does not take into account dividends paid during the life of the option.

The model is also known as the Black-Scholes-Merton Model. Black, Scholes and Merton were the economists who introduced the mathematical model in 1973. Although Black’s death in 1995 excluded him from the award, Scholes and Merton won the 1997 Nobel Prize in Economics for their work.

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