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A complex mathematical formula created by Fischer Black and Myron Scholes, used to calculate the theoretical present value of a transferable stock option at the grant date using variables such as stock price, exercise price, volatility, and expected option term (i.e. the time from grant to exercise). With modifications, this formula can be used to determine the "fair value" of employee stock options. Compare the binomial model.
An article on this website that explains this option-valuation model is "What Are My Stock Options Worth?" by Richard Friedman. A content section of this website covers stock option valuation in general.
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