Overview

The Black Scholes model was developed in order to derive a market efficient price for a derivative of an asset. The model can be used to price a wide family of derivatives, but was easily solved for the case of plain vanilla options.

• Equation - basic equation that dictates the dynamics of an option in the Black Scholes framework.
• Formula - provides an analytic solution to the equation for the simple case of plain vanilla call option.

Numeric Solutions

While analytic solutions exist for plain vanilla type derivatives (see Black Scholes formula above), some more exotic type derivatives have no exact solutions. For these derivatives, numeric approximations can be used.

• Binomial Model
• Finite Differences