What Is the Black-Scholes Model Used for in Financial Derivatives?

The Black-Scholes model is a mathematical model used to estimate the theoretical fair price (premium) of European-style options. It uses five key inputs: the current price of the underlying asset, the option's strike price, the time to expiration, the risk-free interest rate, and the expected volatility of the underlying asset.

It is foundational for pricing and risk management in the options market.