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courtrigrad
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Can someone explain the Black Scholes Equation in simple english? What is it used for?
Thanks
Thanks
http://en.wikipedia.org/wiki/Black-ScholesThe Black-Scholes model, often simply called Black-Scholes, is a model of the varying price over time of financial instruments, and in particular stocks. The Black-Scholes formula is a mathematical formula for the theoretical value of European put and call stock options that may be derived from the assumptions of the model. The equation was derived by Fisher Black and Myron Scholes; the paper that contains the result was published in 1973. They built on earlier research by Paul Samuelson and Robert Merton. The fundamental insight of Black and Scholes was that the call option is implicitly priced if the stock is traded. The use of the Black-Scholes model and formula is pervasive in financial markets. [continued]
The Black Scholes Equation is a mathematical model used to calculate the theoretical price of options contracts. It was developed by economists Fischer Black and Myron Scholes in 1973 and is widely used in finance to determine the fair value of stock options.
The Black Scholes Equation uses various inputs, such as the current price of the underlying asset, the strike price, time until expiration, and volatility, to calculate the theoretical price of an option. It assumes that the price of the underlying asset follows a log-normal distribution and takes into account the risk-free interest rate.
The Black Scholes Equation assumes that the underlying asset has a continuous price movement, that there are no transaction costs or taxes, and that the market is efficient. It also assumes that the option can only be exercised at expiration and that the underlying asset does not pay dividends.
The Black Scholes Equation has several limitations, including the assumption of a continuous price movement, which may not hold true in real-life markets. It also does not take into account market fluctuations or unexpected events, and it is only accurate for European-style options.
The Black Scholes Equation is used by traders, investors, and financial analysts to determine the fair value of options contracts and to make informed decisions about buying and selling options. It is also used in risk management and hedging strategies to manage the potential losses from options contracts.