What is BLACK-SCHOLES MODEL?

A closedform OPTION pricing model developed by Black and Scholes to value EUROPEAN OPTIONS on nonDIVIDEND paying COMMON STOCKS. The BlackScholes framework generates option prices based on a series of assumptions including continuous movement of the UNDERLYING (i.e., a STOCHASTIC PROCESS), unlimited borrowing at a RISKFREE RATE, and no friction costs. The equations for CALL OPTIONS and PUT OPTIONS are given as: where S is the stock price, X is the STRIKE PRICE, t is the time to maturity, rf is the riskfree rate.

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