Black's Model - Explained
What is Black's Model?
Written by Jason Gordon
Updated at April 17th, 2022
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Table of Contents
What is Black's Model?How Does Black's Model Work?Academic Research on Black's ModelWhat is Black's Model?
The Blacks model is a mathematical model for pricing derivative instruments such as options contract, swaptions, bond options, and other interest-rate derivatives. The Blacks model is otherwise called Black-76, it was first presented in 1976 by Fischer Black in one of his papers. This model is a variant of the Black-Scholes options pricing model, as a revised version, the Blacks model can be applied to interest rate cap loans and other derivatives.
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How Does Black's Model Work?
The Black model is an option pricing model that can be applied to derivatives and capped variable rate loans. The Black model was developed in 1976 by the collaborative efforts of Fischer Black, an American economist and other developers such as Robert Merton and Myron Scholes who established the Black-Scholes model. This model was developed to enhance how commodities and options contracts were valued in the market. The pricing of commodity options is important, and this model offers an adjustment to the Black-Scholes model on how commodity options are priced. According to Fischer Black, the price at which traders agree to buy or sell a security at a future time is the futures price. Black 76 has several positions on the option pricing model different from that of the Black-Scholes model. The major difference between these two models that that Blacks model uses forward prices to value futures option while the Black-Scholes model uses spot prices.
