Stocks & Commodities V. 37:08 (18–22): The Black-Scholes Model Demystified by Ken Muranaka

The Black-Scholes Model Demystified by Ken Muranaka

The Black-Scholes formula looks complicated but understanding its key components actually only requires some basic arithmetic and elementary algebra. Since trading derivatives always involves this model in one way or another, we’ll break down the logic behind the formula.

Traders in derivative markets actively use risk parameters such as delta and gamma. They also use the Black-Scholes model for analysis, something that is also used in corporate finance and even in areas unrelated to finance. Though the Nobel-winning Black-Scholes model (BSM) is a partial differential equation, each derivation step of this mathematical model can be understood with some simple arithmetic and elementary algebra ...