Option Pricing Model

An option pricing model is a mathematical way to determine the fair value of a financial contract called an option, which gives the owner the right to buy or sell an asset at a specific price within a certain time. It considers factors like the current price of the asset, the time until expiration, volatility (price swings), and interest rates. By analyzing these, the model helps investors assess how much an option should be worth, aiding in making informed trading decisions. Common models include the Black-Scholes and Binomial models.