Black-Scholes Model
The Black-Scholes model is a mathematical model used in finance to estimate the theoretical price of European-style options, which are financial derivatives that give the holder the right to buy or sell an underlying asset at a specified price on or before a certain date. It calculates option prices based on factors such as the current stock price, strike price, time to expiration, risk-free interest rate, and volatility of the underlying asset. The model assumes that markets are efficient, and it has become a foundational tool in quantitative finance and options trading.
Developers should learn the Black-Scholes model when working in fintech, algorithmic trading, or quantitative analysis, as it is essential for pricing options, managing financial risk, and building trading algorithms. It is particularly useful in applications like automated trading systems, risk assessment tools, and financial modeling software, where accurate option valuation is critical for decision-making and compliance with financial regulations.