Black Scholes Model
What is the Black Scholes Model?
The Black Scholes Model is a mathematical model that is used to estimate the price of stock options. It provides investors with the ability to hedge their investment risk by eliminating the option's option to sell the underlying asset at a set price. The Black-Scholes equation, which is based on a PDE, and its associated formula are used to provide a theoretical estimate of the correct price for European stock options. This model is important because it shows that an option has a unique and unchangeable price regardless of the risk associated with its underlying security and expected return.