The Black-Scholes Model is one of the most important concepts in modern financial theory. It was developed in 1973 by Fisher Black, Robert Merton and Myron Scholes. It is still widely used today, and regarded as one of the best ways of determining fair prices in options trading.
It is a model of price variation over time of financial instruments such as stocks that can, among other things, be used to determine the price of a call option.
For years, companies that paid workers with stock options could avoid deducting the cost of those options as an expense. The rules changed in 2005, when the accounting industry updated its guidelines on share-based payments, in a rule called FAS 123(R).
The Black-Scholes model is a Nobel Prize-winning formula that can determine the theoretical value of an option on the basis of a series of variables. Because options grants to employees aren't replicas of exchange-traded options, the Black-Scholes rules require some modification for employee options.
The model’s equation is complex, but the variables are simple to understand. They are also helpful in determining the consequences of investing in commodities whose prices have higher volatility.