Black Scholes Option Pricing Model

Option pricing techniques have reached a level of sophistication that transformed the option trading market into the hugely lucrative industry that it is today. Yet, they are among the most mathematically complex of all applied areas of finance. To find the fair value for an option, is of course the goal of option pricing techniques.

The derivation of the formulas that formed the basis for modern option pricing techniques and demonstrated revolutionary utility in determining what an option is worth at any given time, was the ground-breaking work of Myron Scholes, Robert Merton, and the late Fischer Black. In 1997, Robert Merton from Harvard University and Myron Scholes, a professor of finance (emeritus) from Stanford University, were awarded the Nobel Prize in economics for their work in developing and extending the Black-Scholes formula.

Financial analysts can now accurately calculate what value to put on a financial derivative, such as a stock option, due to the important work which won these men the Nobel Prize.