Ashir Sai Kapoor
ABSTRACT
An option is a contract between two parties with opposing views on an underlying asset. The option's premium is what the writer (seller) decides the buyer must pay per share of the option. The Black-Scholes model is a mathematical model that uses stochastic processes, geometric Brownian motion, and other assumptions to price options. This paper aims to understand how the Black-Scholes model works along with when it is an appropriate method for pricing options. In general, the model is considered accurate, although during periods of extreme events, rapid price movements, and high volatility, the model fails to price options accurately. Hence, when pricing options, the Black-Scholes Model would not be an appropriate choice for times of extreme events or high volatility. Otherwise, the model is considered accurate and can be a great tool for pricing options efficiently.
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