The Black-Scholes model is a mathematical equation invented by Fischer Black and Myron Scholes that first appeared in their seminal paper of 1973 opening a new wave of selling and buying financial contracts. This economic formulation was well received and recognized to be effective by the financial community to the extent that it won Black and Scholes a noble price in 1997. However, on the 19th October, 1987 – The Black Monday, the world experienced a severe shock when the markets suddenly crushed bringing to light the flaws in the mighty celebrated Black-Scholes model. The number one mistake in the model was the assumption that a given contact could be priced at the same volatility level irrespective of the strike price – the price a contract owner had to pay at the expiry date of the contract. A more economic perspective is discussed here.

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