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The Black-Scholes option pricing formula is used widely in practice, especially by international banks in trading OTC options. is not widely used outside of the academic world. works well enough, but is not used in the real world because no one has the time to flog their calculator for five minutes on the trading floor. none of the options

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Answer:

The Black-Scholes option pricing formula is used widely in practice, especially by international banks in trading OTC options.

Explanation:

The Black-Scholes option pricing formula is used to calculate the fair price of a call or put option. It is done by considering six variables:

  • volatility
  • type of option
  • underlying stock price
  • time
  • strike price
  • risk-free rate

The price for a risky asset (e.g. private corporation stock) is calculated against the price of a risk free asset (e.g. government bond). It can only be used to set a price for European options since American options can be exercised before the expiration date which doesn't fit into the fixed variables of the formula.

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