Answer to Question #68127 in Finance for Simon

Question

Discuss the development & importance of the option pricing theory?

Answer 1

Option pricing theory is the theory of how options are valued in the market. The Black-Scholes model is the most common option pricing theory.
The basic mission of option pricing theory is to calculate the probability that an option will expire in the money. To do this, the Black-Scholes model looks beyond the simple fact that the value of a call option increases when the underlying stock price increases or when the exercise price decreases.
Reference:
https://www.investinganswers.com/financial-dictionary/options-derivatives/option-pricing-theory-5094