20-10-2014, 03:49 PM
In the early 1970s, Fischer Black, Myron Scholes, and Robert Merton made a major breakthrough in the pricing of stock options. This involved the development of what has become known as the Black-Scholes model. The model has had a huge influence on the way that traders price and hedge options. It has also been pivotal to the growth & success of financial engineering in the last 20 years.In 1997, the importance of the model was recognized when Robert Merton and Myron Scholes were awarded the Nobel prize for economics. Sadly, Fischer Black died in 1995, otherwise he too would undoubtedly one of the recipients of this prize. The most important one is that the concepts behind the Black-Scholes analysis provide the framework for thinking about option pricing. All the research in option pricing since the Black-Scholes analysis has been done either to extend it or to generalize it. Another important reason for studying the Black-Scholes theory is that the financial world uses it as a standard. In fact, traders quote Black-Scholes volatility to each other, not the actual price of the options! Further, Black-Scholes prices still give very good approximations to the p