The BSM Model and European Option Pricing

  • Arlie O. Petters
  • Xiaoying Dong
Part of the Springer Undergraduate Texts in Mathematics and Technology book series (SUMAT)


The Black-Scholes-Merton (BSM) model, also known as the Black-Scholes model, is one of the pillars of finance, providing a powerful theoretical framework that is widely applicable in financial engineering and corporate finance. This chapter covers: the BSM model; derivation of the BSM p.d.e. using a self-financing, replicating portfolio; applications to pricing European calls and puts; application to pricing warrants; risk-neutral pricing and the fundamental theorems of asset pricing; binomial-tree pricing of European calls; delta hedging; option Greeks and managing portfolio risk; the BSM model versus market data, including jumps, skewness, kurtosis, and volatility skews; and the Merton jump-diffusion model and market incompleteness.


Trading Strategy Implied Volatility Standard Brownian Motion Strike Price Geometric Brownian Motion 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


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Copyright information

© Arlie O. Petters and Xiaoying Dong 2016

Authors and Affiliations

  • Arlie O. Petters
    • 1
  • Xiaoying Dong
    • 1
  1. 1.Department of MathematicsDuke UniversityDurhamUSA

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