Economics & Decision · 1973
The Pricing of Options and Corporate Liabilities
Fischer Black, Myron Scholes
Overview
Black and Scholes derived a formula for the fair price of a stock option. By showing that an option can be perfectly hedged with the underlying stock, they removed the need to know investors' risk preferences and produced the famous Black–Scholes equation.
Created modern quantitative finance; underpinned the 1997 Nobel Prize in Economics.
Key findings
Methods
A no-arbitrage argument: constructing a risk-free portfolio of the option and the underlying asset leads to a partial differential equation whose solution is the option price.
Keywords
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