A Close Look into Black-Scholes Option Pricing Model




The Black Scholes Model is one of the most significant concepts in modern financial theory both in terms of approach as well as applicability. Attention in the theory of option pricing received a major motivation in 1973 with the publication of a pioneering paper titled “The Pricing of Options and Corporate Liabilities by Black and Scholes who developed closed-form formula to calculate the prices of European calls and puts, based on certain assumptions by showing how to hedge continuously the exposure on the short position of an option. This paper carefully studies the Black-Scholes Model of option pricing and makes a more detailed analysis of the assumptions of the model and the mathematical derivation process of the model and also analyses the inherent loopholes in the theory. The concepts behind the Black-Scholes analysis provide the framework for thinking about option pricing.


Keywords: Black-Scholes model, option price, implicit volatility, Brownian motion; Volatility.

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