A mathematical formula for determining an option's premium. The Black-Scholes model can be applied to compute the theoretical value for an option using the current trading price of the underlying security, the strike price of the option, the time to expiration, the expected dividends, the expected interest rates and the implied volatility. The Black-Scholes model is not 100% accurate but it is widely used today to calculate theoretical prices. It is also used to calculate the implied volatility of an option.
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