The Pricing of Options and Corporate Liabilities

By F. Black, Myron S. Scholes. 1973

If options are correctly priced in the market, it should not be possible to make sure profits by creating portfolios of long and short positions in options and their underlying stocks. Using this principle, a theoretical valuation formula for options is derived. Since almost all corporate liabilities can be viewed as combinations of options, the formula and the analysis that led to it are also applicable to corporate liabilities such as common stock, corporate bonds, and warrants. In particular, the formula can be used to derive the discount that should be applied to a corporate bond because of the possibility of default.

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Citations in the corpus

Introduction to Online Convex Optimization (2016, methodology): “The Geometric Brownian Motion model for stock prices was suggested and studied as early as 1900 in the PhD thesis of Louis Bachelier (17), see also Osborne (83), and used in the Nobel Prize winning work of Black and Scholes on options pricing (19).”
Financial Literacy and Participation in the Derivatives Markets (2018, unknown): “…(1995) suggested that two promising explanations for nonparticipation were inertia and a departure from expected-utility 9 The development of the Black and Scholes (1973) formula has changed derivatives trading over the past four decades, such that the derivatives markets have experienced…”
Optimal Diversity: Increasing Returns versus Recombinant Innovation (2008, background): “These theories have links with options pricing theory in financial economics (Black and Scholes 1973), where an option is defined as the right to make a financial investment decision in a certain time interval.”
Crash Risk in Currency Markets (2015, unknown): “Put and call prices in the model can be expressed using the Black and Scholes (1973) formula, even though the model features non-Gaussian shocks.”
Quant GANs: deep generation of financial time series (2019, methodology): “Afterward, we provide a formal deﬁnition of TCNs.”
Is There an Intertemporal Relation between Downside Risk and Expected Returns? (2009, unknown): “Third, asset returns have been modeled in continuous time as diffusions by Black and Scholes (1973), as pure jump processes by Cox and Ross (1976), and as jump diffusions by Merton (1976).”
The information content of high-frequency data for estimating equity return models and forecasting risk (2010, methodology): “We also offer an attractive alternative to existing moment-based estimation approaches such as Bollerslev and Zhou (2002), Corradi and Distaso (2006) and Todorov (2009) in terms of more fully exploiting the information content of high frequency volatility measures in various model settings via their”
Do firms understate stock option-based compensation expense disclosed under SFAS 123? (2006, methodology): “is the Black and Scholes (1973) value of options granted during the year, calculated using VOL, DIV, INT, and LIFE_PRED.”