2010•Encyclopedia of Quantitative FinanceRequires access

Black–Scholes Formula

Mark H. Davis

Abstract

Abstract This article describes and proves the Black–Scholes formula, the most famous formula in financial economics. Its relationship to partial differential equations is discussed, as well as the hedge parameters used in trading and an alternative form, the Black “forward” option pricing formula. Finally, the relationship of this theoretical formula to the practical world of option trading is discussed.

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Key concepts: Black–Scholes model, Hedge, Mathematics, Mathematical economics, Valuation of options, Differential (mechanical device), Partial differential equation, Economics