Black-Scholes Model Definition

Definition: It refers to a model developed in 1973 by Fisher Black, Robert Merton and Myron Scholes. It is used for pricing financial options. The model assumes that the price of heavily traded assets follow a geometric Brownian motion with constant drift and volatility. When applied to a stock option, the model incorporates the constant price variation of the stock, the time value of money, the option’s strike price and the time to the option’s expiry.