What is the Black Scholes model?

Question

Can you give me main 3 concepts of the model?

Answer 1

The Black-Scholes model is a mathematic model to determine to value of an option, as the previous two answers indicated. As originally published, given

the price of the underlying,
the strike price of the option,
the amount of time before expiration,
the implied (expected) volatility of the underlying, and
the risk-free interest rate

the model will give

the value of the put option,
the value of the call option,
the delta of the options,
the gamma of the options,
the vega of the options,
the theta of the options, and
the rho of the options

for a European-style options that do not pay dividends.

If you do not know what "the greeks" are see

http://www.investopedia.com/articles/optioninvestor/02/120602.asp

Modifications for American-style options and dividends have now be incorporated in the model

Some of the concepts in the model are

The distribution of prices in the future will be lognormally distributed.

The underlying security will be neutral to the risk-free interest rate. (For example, if the underlying is a stock trading at $100 per share, the options expire in one year, and the risk-free rate is 5.2%, the peak of the price distribution bell curve will be at $105.20.)

Options positions may be hedged with long and short positions in the underlying. (This presents a problem when the underlying is a stock and there are no shares available to be shorted.)

Answer 2

As the other posters mentioned, the Black-Scholes model prices options on financial contracts. For instance, it will price a call option on a stock.

Three of the main assumptions underlying the Black-Scholes model are:
1) It assumes that stock prices are random and unpredictable
2) It assumes that a stock's volatility is always constant
3) It is only useful on "European options"

To calculate the Black-Scholes price on various options, feel free to check out:

http://www.ronakke.com/Black-Scholes-Calculator.html

Answer 3

accept as true with John different than ought to examine " all the Black Scholes equation does is produce an estimate of what a truthful fee for the concepts would desire to be in accordance with A well-known and incessant VOLATILITY..." As he factors out, there is not any well-known and incessant volatility, there is purely the industry's wager at what volatility could be. word that the B-S says that the implied vol ought to be an identical on all the SPXU concepts and of direction they don't seem to be. there are a number of motives accessible for vol skews, such as non-normality of returns, discontinuity of fee pattern paths, behavioral finance, liquidity, and so on.. Edit: "The type does in high quality condition especially heavily with close to term expiration's, so extra desirable out expirations do no longer paintings as effectively?" It probable relies upon on what you recommend via in high quality condition especially heavily, yet you may assume skews to be extra stated in longer dated concepts as an example given which you purely have extra danger for a style of sixteen known deviation strikes.

Answer 4

Scholes easy, then Lampard then Gerrard. I could write an essay on why but I've spent enough time debating Lampard and Gerrard on here.

Let's just say that Lampard and Gerrard are both nowhere near Scholes in terms of controlling a game - they're highlights players.

Btw, Carragher was talking sh!t, but Neville, whilst good, also contradicted himself slightly i.e. he said that Scholes is the best player he's played with, implying he's better than Ronaldo (different types of players but still). However, later, he said he didn't like to compare Ronaldo and Messi. So he's willing to say that Scholes is better than Ronaldo in his opinion, but he wasn't willing to say the same for Messi. Does he therefore think that Scholes is better than Messi?

I'm being a bit pedantic there but it did make me smile :)

Answer 5

Originally it was an equation to value European options.

Answer 6

its a equation to value a bond on the open market.

Answer 7

It's a way to value options....don't know what the other dude is talking about???!!??