The Black model (also known as the Black-76 model) is a variant of the Black–Scholes option pricing model. Its primary applications are for pricing options on future contracts, bond options, interest rate cap and floors, and swaptions. It was first presented in a paper written by Fischer Black in 1976.
It assumes that the relevant forward or futures price follows a log-normal distribution under a risk-neutral pricing measure and that the option payoff is discounted at a constant risk-free interest rate. In its standard form the model is used to price European call and put options on commodity futures, bond options, and interest rate caps and floors and swaptions.
Background and relation to the Black–Scholes model
In 1976 Black published an article titled The pricing of commodity contracts in the Journal of Financial Economics in which he adapted the Black–Scholes approach to European options on commodity futures.
External links
Discussion
- Bond Options, Caps and the Black Model Dr. Milica Cudina, University of Texas at Austin
Online tools
- Caplet And Floorlet Calculator Dr. Shing Hing Man, Thomson-Reuters' Risk Management