Option Pricing Models: The Evolution of the Black-Scholes-Merton Model

Enkeleda Shehi – Tirana Business University College, Faculty of Business and Law, Rruga Rezervat e Shtetit, Lundör, Tirane, Shiperi, Albania

Abstract: This paper focuses on the development and impact of the Black- Scholes-Merton (Black-Scholes) model in mathematical finance. It begins with an overview of the Black-Scholes model, including its foundational assumptions, the Black-Scholes equation, and its formula for pricing European options. The paper discusses the model’s significant advantages, such as its ability to estimate market volatility and provide a self-replicating hedging strategy. It also addresses its limitations, including assumptions of constant volatility and perfect market conditions, which often do not align with real-world scenarios. Finally, this paper reviews advancements that have refined the model, including adjustments for stochastic volatility, price jumps, and market imperfections.

10th International Scientific Conference ERAZ 2024 – Conference Proceedings: KNOWLEDGE BASED SUSTAINABLE DEVELOPMENT,  hybrid – online, virtually and in person, Lisbon, Portugal, June 6, 2024

ERAZ Conference Proceedings published by: Association of Economists and Managers of the Balkans – Belgrade, Serbia

ERAZ conference partners: Faculty of Logistics, University of Maribor, Maribor (Slovenia); University of National and World Economy – UNWE, Sofia (Bulgaria); Center for Political Research and Documentation (KEPET), Research Laboratory of the Department of Political Science of University of Crete (Greece); Institute of Public Finance – Zagreb (Croatia); Faculty of Tourism and Hospitality Ohrid, University of St. Kliment Ohridski from Bitola (North Macedonia)

ERAZ Conference 2024 Conference Proceedings: ISBN 978-86-80194-86-8, ISSN 2683-5568,

DOI: https://doi.org/10.31410/ERAZ.2024

Creative Commons Non Commercial CC BY-NC: This article is distributed under the terms of the Creative Commons Attribution-Non-Commercial 4.0 License (https://creativecommons.org/licenses/by-nc/4.0/) which permits non-commercial use, reproduction and distribution of the work without further permission. 

Suggested citation