• The Black-Scholes Model, also known as the Black-Scholes-Merton Model (BSM), is a differential equation widely used to price option contracts.

  • The Black-Scholes model requires five input variables: strike price, current stock price, time to expiration, risk-free rate, and volatility.
  • Although the Black-Scholes model is usually accurate, it makes certain assumptions that can lead to predictions that differ from actual results.
  • The standard BSM model is only used to value European options because it does not take into account that US options can be exercised before the expiration date.