Black-Scholes Model

Introduction

The Black-Scholes pricing model was first introduced by Fischer Black, Myron Scholes, and Robert Merton through their achievement and development in the pricing of European stock options. The Black–Scholes model was first published by Fischer Black and Myron Scholes in their 1973 paper, "The Pricing of Options and Corporate Liabilities", published in the Journal of Political Economy. And after that, in 1997, Robert Merton and Myron Scholes received the Nobel Prize in Economics for their work. Unfortunately, Fischer Black died in year 1995.

Strengths

The Black-Scholes model is still widely used in practice because it is easy to calculate with elegant and insightful mathematics equations. Besides that, it is a useful approximation when analyzing of direction in which prices move when across critical points. It’s reversible, as the model's original output, price, can be used as an input and one of the other variables solved for; the implied volatility calculated in this way is often used to quote option prices. The work of Black, Merton and Scholes is a success in the real economics world, and is quite likely to be considered as one of the best achievement in modern economics. The forecasted or predicted prices worked out by Black Scholes formula is closed to reality. As of today, many engineers and mathematicians learn how to setup differential equations by Black-Scholes analysis and use it to solve differential equations in pricing financial derivatives. This is significant especially in large finance company in the world will hire such individual positions. Black Scholes model allowed continuous trading with no transactions cost and short selling is allowed. Continuous time finance is the clearest success of the science of economics, in the sense of it can be taught and reliably used. Black-Scholes model creates clean derivatives called Greeks. The