Background

The Black-Scholes Model was formulated in 1973 by Fischer Black and Myron Scholes. It won the Nobel Prize in economics in 1997. This is the premier option pricing model that most institutions use in pricing stock derivatives. In 1976 Fischer Black made some minor modifications to the Black Scholes model to adapt it for use in evaluating options on futures contracts. The Cox, Ross and Rubinstein model was developed using a similar approach to the Black-Scholes model, but assumes the stock moves in a binomial distribution. In 1987 Giovanni Barone-Adesi and Robert Whaley published a quadratic approximation method of valuing American options. Their Quadratic Approximation Model has become one of the more popular pricing algorithms.