A model published in 1973 that calculates the fair price of European options from price, strike, time, interest rate and volatility.
Fischer Black, Myron Scholes and Robert Merton showed that an option can be replicated with shares and a loan. Its price therefore doesn’t depend on the stock’s expected return. The only unobservable input is volatility – conversely, implied volatility is backed out from market prices. The model assumes constant volatility and no price jumps, which doesn’t hold in reality.