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Definition of Black-Scholes Equation


Definition: The Black-Scholes equation is an equation for option securities prices on the basis of an assumed stochastic process for stock prices.

The Black-Scholes algorithm can produce an estimate the value of a call on a stock, using as input:

  • an estimate of the risk-free interest rate now and in the near future
  • current price of the stock
  • exercise price of the option (strike price)
  • expiration date of the option
  • an estimate of the volatility of the stock's price
From the Black-Scholes equation one can derive the price of an option.(Econterms)

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