How Is the ‘Black-Scholes Model’ Dependent on Oracle Data?
The Black-Scholes model, used to calculate the theoretical fair price of an option, requires five key inputs. The model is directly dependent on oracle data for two critical inputs: the current spot price of the underlying asset and the implied volatility.
An inaccurate or manipulated spot price from a faulty oracle will lead to a miscalculation of the option's fair value, resulting in mispricing and potential arbitrage opportunities.
Glossar
The Black-Scholes Model
Foundation ⎊ The Black-Scholes model serves as the cornerstone for modern options pricing theory, providing a continuous-time framework for calculating the fair value of derivatives.
Faulty Oracle
Derivation ⎊ A Faulty Oracle within cryptocurrency, options, and derivatives contexts denotes a data source providing inaccurate or manipulated information crucial for pricing and risk assessment.
Current Spot Price
Price ⎊ Within cryptocurrency markets, the current spot price represents the prevailing market value for immediate delivery of an asset, typically denominated in a fiat currency or another cryptocurrency.
Oracle Data
Source ⎊ Oracle Data represents external, real-world information, such as asset prices, interest rates, or market volatility indices, that is securely and reliably fed into a blockchain's smart contracts.