Nowadays, thousands of traders and investors use the formula every day to value stock options in markets throughout the world. Such rapid and widespread application of a theoretical result was new to economics. It was particularly remarkable since the mathematics used to derive the formula were not part of the standard training of practitioners or academic economists at that time. The ability to use options and other derivatives to manage risks is quite valuable. For instance, portfolio managers use put options to reduce the risk of large declines in share prices.
Companies use options and other derivative instruments to reduce risk.
Banks and other financial institutions use the method developed by Black, Merton and Scholes to develop and determine the value of new products, sell tailor-made financial solutions to their customers, as well as to reduce their own risks by trading in financial markets. Financial institutions employ mathematicians, economists and computer experts who have made important contributions to applied research in option theory. They have developed databases, new methods of estimating the parameters needed to value options and numerical methods to solve partial differential equations. Some other scientific contributions Merton and Scholes have made important scientific contributions in addition to those described so far. He also improved and generalized option pricing formula in different directions.