Black-Scholes model valuation of Ricardo International stock options

Black-Scholes Option Pricing Model was developed in the 1970s as a way to generate a legitimate and accurate valuation model for stock prices based on specific circumstances in the market and the stock options. It is the creation of economists Myron Scholes and Fischer Black who aimed to better forecast call options at various times within the option life cycle (PBS, 2000). According to the research, "this work involved calculating a derivative to measure how the discount rate of a warrant varies with time and stock price" (Rubash, 2012). Essentially, the formula is a method for analyzing and forecasting call and put options within specific market circumstances for individual stock options. It is often used in modern investing and trading for "calculating the premium of an option" (Investopedia, 2013). Since its inception, the formula has become a powerful tool that greatly strengthens the ability of investors to forecast just the right circumstances for their potential options. Here, "an investor can precisely replicate the payoff to a call option by buying the underlying stock and financing part of the stock purchase by borrowing" (PBS, 2000). As such, it is an essential tool for any modern firm or investor, especially in such a volatile market as the one we are currently witnessing today.

The model utilizes several major elements regarding the nature of the price and puts of the equity. It relies on the standard relationship between the call premium, current stock price, the lifetime of the option, and the risk-free interest rate. The equation formula for the pricing model can be described in the following diagram as provided by Rubash (2012).