Black–Scholes Formula
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This article describes and proves the Black–Scholes formula, the most famous formula in financial economics. Its relationship to partial differential equations is discussed, as well as the hedge parameters used in trading and an alternative form, the Black “forward” option pricing formula. Finally, the relationship of this theoretical formula to the practical world of option trading is discussed.
Keywords:
Black–Scholes formula;
option pricing;
option replication;
Black–Scholes partial differential equations;
hedge parameters;
Black forward option pricing formula;
robustness of delta hedging
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