Option pricing

Several mathematical models exist to calculate an approximation of the fair value of anoption, among them, the Black-Scholes model andthe binomial model. The values provided by these models depend on at least the following factors:

• the strike price,
• the current market price of the underlying security,
• the volatility of the stock,
• the time until the expiration date, and
• the current risk-free interest rate.

Implicitly or explicitly, these models also rely on particular assumptions about the process of innovations in the underlying security price, dividends, and interest rates; whether the option right is transferable; and the operation of tax law.