![]() ![]() This simplifies the pricing process as there is greater implicit understanding of how prices are derived. ![]() Enhances Market Efficiency: The Black-Scholes model has led to greater market efficiency and transparency as traders and investors are better able to price and trade options. ![]() This allows investors to make smarter choices better aligned with their risk tolerance and pursuit of profit. Allows for Portfolio Optimization: The Black-Scholes model can be used to optimize portfolios by providing a measure of the expected returns and risks associated with different options.The Black-Scholes model is therefore useful to investors not only in evaluating potential returns but understanding portfolio weakness and deficient investment areas. Allows for Risk Management: By knowing the theoretical value of an option, investors can use the Black-Scholes model to manage their risk exposure to different assets.This allows investors and traders to determine the fair price of an option using a structured, defined methodology that has been tried and tested. Provides a Framework: The Black-Scholes model provides a theoretical framework for pricing options. C = SN ( d 1 ) − K e − r t N ( d 2 ) where: d 1 = σ s t l n K S + ( r + 2 σ v 2 ) t and d 2 = d 1 − σ s t and where: C = Call option price S = Current stock (or other underlying) price K = Strike price r = Risk-free interest rate t = Time to maturity N = A normal distribution Current stock (or other underlying) price ![]()
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