What Is the Black-Scholes Model and What Are Its Main Inputs?

The Black-Scholes model is a seminal mathematical model used to estimate the theoretical price of European-style options. It assumes the price of the underlying asset follows a log-normal distribution and that volatility is constant.

The main inputs to the model are: the current price of the underlying asset, the option's strike price, the time to expiration, the risk-free interest rate, and the volatility of the underlying asset. The model is a cornerstone of modern financial derivatives pricing.