Question

Is the BSM(Black Scholes) model the most widely used model for Option Pricing? Or, is there an alternative model more widely used in practice? If so, what is it?

Answer 1

Option pricing is carried out using methods:

1. Black Scholes model

2. Binomial model

Yes, BSM is the most widely used model for option pricing.

Binomial model:

Binomial model is an alternative model which is also used for option pricing.

It is represented in the form of a tree where the stock price is broken down on time-to-time interval. It starts feom the present to expiration. At each step, the stock price is assumed to move up or down based on the volatility and time to expiration. It represents the paths that the stock price could take from present to time of expiration. The final value represented in the tree is the intrinsic value of the stock price.