Black-Scholes model

The Black-Scholes model is a method used to estimate the value to assign to a European put or call option. The model is based on the following variables:

  • The current price of the underlying asset
  • The option strike price
  • The payout return on the underlying asset
  • The riskless rate of return
  • The time period before the option expires
  • The volatility of the underlying asset

The model incorporates the following assumptions, which may not prove to be valid:

  • That the risk-free rate is constant over the measurement period
  • That dividends will be constant over the measurement period
  • That asset volatility remains constant over the measurement period