Abstract
M.Sc.
The innovative work of Black and Scholes [1, 2] extended the mathematical
understanding of the options pricing model, beginning the deliberate study of
the theory of option pricing. Its impact on the nancial markets was immediate
and unprecedented and is arguably one of the most important discoveries
within nance theory to date. By just inserting a few variables, which include
the stock price, risk-free rate of return, option's strike price, expiration
date, and an estimate of the volatility of the stock's price, the option-pricing
formula is easily used by nancial investors. It allows them to price various
derivatives ( nancial instrument whose price and value are derived from the
value of assets underlying them), including options on commodities, nancial
assets and even pricing of employee stock options. Hence, European1
and American2 call or put options on a non-dividend-paying stock can be
valued using the Black-Scholes model. All further advances in option pricing
since the Black-Scholes analysis have been re nements, generalisations and
expansions of the original idea presented by them.