Black–Scholes model - WikipediaFrom the partial differential equation in the model, known as the Black—Scholes equation , one can deduce the Black—Scholes formula , which gives a theoretical estimate of the price of European-style options and shows that the option has a unique price regardless of the risk of the security and its expected return instead replacing the security's expected return with the risk-neutral rate. The formula led to a boom in options trading and provided mathematical legitimacy to the activities of the Chicago Board Options Exchange and other options markets around the world. Based on works previously developed by market researchers and practitioners, such as Louis Bachelier , Sheen Kassouf and Ed Thorp among others, Fischer Black and Myron Scholes demonstrated in the late s that a dynamic revision of a portfolio removes the expected return of the security, thus inventing the risk neutral argument. Merton was the first to publish a paper expanding the mathematical understanding of the options pricing model, and coined the term "Black—Scholes options pricing model". Merton and Scholes received the Nobel Memorial Prize in Economic Sciences for their work, the committee citing their discovery of the risk neutral dynamic revision as a breakthrough that separates the option from the risk of the underlying security.
Risk-Neutral Valuation: Pricing and Hedging of Financial Derivatives
It seems that you're in Germany. We have a dedicated site for Germany. Authors: Bingham , Nicholas H. Since its introduction in the early s, the risk-neutral valuation principle has proved to be an important tool in the pricing and hedging of financial derivatives. Authors of financial engineering texts face a quandary: how technical to make a book?
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