Introduction:

It was an ordinary autumn afternoon in Belmont, Mass. 1969, when Fischer Black, a 31 year old independent finance contractor, and Myron Scholes a 28 year old assistant professor of finance, at MIT hit upon an idea that would change financial history. Black had been working for Arthur D. Little in Cambridge, Mass., when he met a colleague who had devised a model for pricing securities and other assets. With his Harvard Ph.D. in applied mathematics just five years old, Black's interest was sparked. His colleague's model focused on stocks, so Black turned his attention to options, which were not widely traded at the time. By 1973, the tandem team of Fischer Black and Myron Scholes had written the first draft of a paper that outlined an analytic model that would determine the fair market value for European type call options on non-payout assets. They submitted their work to the Journal of Political Economy for publication, who promptly responded by rejecting their paper. Convinced that their ideas had merit, they sent a copy to the Review of Economics and Statistics, where it elicited the same response. After making some revisions based on extensive comments from Merton Miller (Nobel Laureate from the University of Chicago) and Eugene Fama, of the University of Chicago, they resubmitted their paper to the Journal of Political Economy, who finally accepted it. From the moment of its publication in 1973, the Black and Scholes Option Pricing Model has earned a position among the most widely accepted of all financial models.