Black-Scholes Model

We use the Black-Scholes model to calculate a stock option’s fair value. You won’t need to perform any calculations with the Black-Scholes model. You just need to know what goes into this model and how it works.

The Black-Scholes model includes the following information:

• Call/Put option premium price

• Current stock price

• Strike price/exercise price

• Risk-free interest rate

• Time to maturity

• Volatility of the stock

The Black-Scholes model only applies to European-style options, which are stock options that can only be exercised at the end of their life. With an American-style option, you can exercise it at any point throughout the life of the option.