Theory of Rational Option Pricing, Merton, 1973

Theory of Rational Option Pricing and Black-Scholes Model

Theory of Rational Option Pricing is a paper by Robert C. Merton, where Merton examines the option pricing methodology introduced by Fischer Black and Myron Scholes inĀ The Pricing of Options and Corporate Liabilities (1973). Merton provides an alternative derivation of the Black-Scholes formula that is valid under weaker assumptions and therefore more useable than the original (it is now known as the Black-Scholes Equation). The paper also provides several extensions of the Black-Scholes option pricing theory.

Theory of Rational Option Pricing was first published in The Bell Journal of Economics and Management Science, Vol. 4, No. 1. (Spring, 1973), pp. 141-183.

Theory of Rational Option Pricing PDF

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