The model assumes the price of heavily traded assets follows a geometric Brownian motion with constant drift and volatility. When applied to a stock option, the model incorporates the constant price variation of the stock, the time value of money, the option's strike price, and the time to the option's expiry.
Also called Black-Scholes-Merton, it was the first widely used model for option pricing. It's used to calculate the theoretical value of options using current stock prices, expected dividends, the option's strike price, expected interest rates, time to expiration and expected volatility.
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