Knowledge

Black-Scholes Option Pricing Model

A method to calculate the price of a European style option (exercise on expiry date only) assuming that the underlying instrument pays a constant dividend, extraneous costs such as taxes are ignored, a constant risk-free interest rate, constant volatility and the price follows a probability distribution that is lognormal (a mathematical statistic: the logarithm of the price is normally distributed) until expiration. Although this model produces a theoretical value, it is considered the industry standard.