Black-Scholes Model

A mathematical model for pricing European-style options, published by Fischer Black, Myron Scholes, and Robert Merton in 1973. The model uses five inputs -- stock price, strike price, time to expiration, risk-free rate, and volatility -- to calculate a theoretical fair value. Scholes and Merton won the Nobel Prize in Economics for this work in 1997. While the model assumes constant volatility and log-normal returns (which real markets violate), it remains the foundation of modern options pricing.