The Black-Scholes equation is a mathematical formula used to price European-style
options, which are options that can only be exercised at expiration. It was developed by
economists Fischer Black and Myron Scholes in 1973 and has become a cornerstone of option
pricing theory. The equation is derived under certain assumptions, including efficient markets,
no transaction costs, and constant volatility. It has practical applications in derivatives trading,
risk management, and portfolio optimization.
The Black-Scholes equation is as follows:
C
= S * N(d1) - X * e^(-r * T) * N(d2)