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.
An asset swap is used to convert cash flow characteristics in order to hedge risks from one financial instrument with undesirable cash flow characteristics to another with favorable cash flow characteristics.
The Bank Note Swap Rate (BBSW) is a short-term interest rate used as a benchmark for valuing Australian dollar derivatives and securities, primarily floating rate bonds.
Boundary conditions were used to establish the minimum and maximum possible values of call and put options prior to the introduction of binomial tree and Black-Scholes pricing models.
A call is an option contract that gives the holder the right, but not the obligation, to buy a certain amount of the underlying security at a certain price for a certain time.
A collar is an options strategy that involves buying a put option down and selling a put option up, which is used to protect against large losses but also cap large profits up.