The Nobel-Awarded Black Scholes Model: Key Characteristics and Its Applications to Option Valuation - Ultimate Collapse of LTCM Fund

The aim of this paper is to present different views on Black-Scholes model. The Black-Scholes equation is one of the most significant equations in financial mathematics. It is commonly used to determine price of options. However its applications as well as modifications go far beyond this market: it is utilized in fx currency market, IRS market, swaptions market and other. Therefore it is not surprising that Robert Merton and Myron Scholes were awarded Noble Prize for an invention of the model in 1997. This study presents key elements of the model as well as arguments for and against its adherence to real market conditions. The history of LTCM fund indicates that even appropriate model, when used inadequately, can bring heavy losses and disruption on the international financial market.