What is the Black-Scholes model?

Options are a financial tool that holds the right to buy or sell underlying shares or commodities at a future moment at the agreed price. The Black-Scholes model, for which Fischer Black, Myron Scholes and Robert Merton have won the Nobel Prize in Economics, is a tool for the price possibilities of its own capital. Before its development there was no standard method of price possibilities; In a very real sense, the Black-Scholes model refers to the beginning of the modern era of financial derivatives.

There are several assumptions that are the basis of the Black-Scholes model. The most important thing is that volatility, the degree of how much the shares can be expected in the short term is a constant over time. The Black-Scholes also assumes that supplies are moving in a way referred to as random walk ; At any given moment they are likely to move up as if they were moving down. By combining these assumptions with the idea that the cost of the possibility should not provide any momentThe seller's or buyer's profit can be formulated to calculate the price of any possibility.

The

Black-Scholes model lasts as input current prices, the length of time, as long as this possibility expires worthless, the estimate of future volatility known as supposed volatility and the so-called return rate without risk, generally defined as the interest rate of US treasures. The model also works otherwise: instead of calculating the price, the expected volatility can be calculated at a given price.

Merchants often refer to the "Greeks", especially Delta, Vega and Theta. These are mathematical characteristics of the Black-Scholes model named after the Greek letters used to represent their representation in equations. Delta measures how much option prices will be compared to the basic, Vega is the sensitivity of the option price to change in the implicated volatility and Thetaje expected change in price price due to time.

There are known problems with the Black-Scholes; Markets often move in a way that is not in line with the hypothesis of random walks and volatility is not really constant. For solving these restrictions, a variant of black schols was known as an arch, the author of the engineer conditional heteroskedasticity. The key setting is to replace constant volatility with stochastic or random volatility. After the sheet came an explosion of different models; Garch, E-Garch, N-Garch, H-Garch, etc., all include increasingly complex volatility models. In everyday practice, however, the classic Black-Scholes model remains dominant with options traders.