Introduction to the BlackScholes formula Finance Capital Markets Khan Academy
Voiceover: We're now gonna talk about probably the most famousformula in all of finance, and that's the BlackScholes Formula, sometimes called theBlackScholesMerton Formula, and it's named after these gentlemen. This right over here is Fischer Black. This is Myron Scholes. They really laid thefoundation for what led to
the BlackScholes Model andthe BlackScholes Formula and that's why it has their name. This is Bob Merton, who reallytook what BlackScholes did and took it to another level to really get to ourmodern interpretations of the BlackScholes Modeland the BlackScholes Formula. All three of thesegentlemen would have won the Nobel Prize in Economics,
except for the unfortunate fact that Fischer Black passed awaybefore the award was given, but Myron Scholes and Bob Merton did get the Nobel Prize for their work. The reason why this is such a big deal, why it is Nobel Prize worthy, and, actually, there's many reasons. I could do a wholeseries of tutorials on that,
is that people have beentrading stock options, or they've been trading optionsfor a very, very, very long time. They had been trading them, they had been buying them, they had been selling them. It was a major part offinancial markets already, but there was no really good way of putting our mathematical minds around
how to value an option. People had a sense of thethings that they cared about, and I would assumeespecially options traders had a sense of the thingsthat they cared about when they were trading options, but we really didn't have ananalytical framework for it, and that's what theBlackScholes Formula gave us. Let's just, before we dive intothis seemingly hairy formula,
but the more we talk about it, hopefully it'll startto seem a lot friendlier than it looks right now. Let's start to get an intuition for the things that we would care about if we were thinking aboutthe price of a stock option. You would care about the stock price. You would care about the exercise price.