The Black-Scholes model

The Black-Scholes model determines a fair price for American options. It does so by considering a risk-free interest rate and assumes that the asset price obeys Geometric Brownian Motion.

In 1997 Scholes and Merton were awarded the Nobel prize in economics, Black having died in the interim. At the time the two had left academia to work for Long Term Capital Management, the following year the US Federal Reserve intervened to save the market after the use of the model by their employer had racked up billions of dollars in losses.

Themes

Exponential, Finance, Normal distribution

History