What Is the ‘Black-Scholes Model’ and What Is Its Primary Use in Derivatives?
The Black-Scholes Model is a mathematical model used to estimate the theoretical price of European-style options. It considers five key inputs: the underlying asset's price, the strike price, the time to expiration, the risk-free interest rate, and the implied volatility.
Its primary use is to provide a benchmark for option valuation, allowing traders to determine if an option is currently over- or under-priced in the market. While originally for traditional finance, it is adapted for crypto options.
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.
Implied Volatility
Expectation ⎊ This value represents the market's consensus forecast of future asset price fluctuation, derived by reversing option pricing models using current market premiums.
Mathematical Model
Framework ⎊ This represents a set of equations and assumptions designed to map observable market inputs to a theoretical price or risk metric for a given financial derivative, such as a crypto option or perpetual swap.