Groundlearn / Glossary / Black–Scholes–Merton model
Black–Scholes–Merton model (BSM)
Also called BSM, Black-Scholes. A CFA and FRM term, defined in plain English with the distinction examiners test.
What it means
A closed-form model for European option prices, assuming lognormal prices, constant volatility and continuous frictionless trading.
The exam angle
Its assumptions are known to be wrong — constant volatility most obviously, which is why the implied volatility smile exists at all.
Where it appears in the syllabus
- DerivativesCFA Level I · exam weight 6–9% · Forwards, futures, swaps, options and arbitrage-free pricing.
- DerivativesCFA Level II · exam weight 5–10% · Forward commitments and contingent claims — binomial, BSM, the Greeks.
- Valuation & Risk ModelsFRM Part I · exam weight 30% · VaR and ES, option valuation, bond risk, stress testing, credit and op risk.
Related terms
- Call optionThe right, without the obligation, to buy an asset at the strike price by expiry.
- DeltaThe change in an option’s value for a small change in the underlying price.
- Lognormal distributionThe distribution of a variable whose natural logarithm is normally distributed.
- Put optionThe right, without the obligation, to sell an asset at the strike price by expiry.
- Put–call parityThe no-arbitrage relationship linking a European call, a European put, the underlying and a risk-free bond of the same…
- Basis riskThe risk that a hedge and the exposure it hedges do not move together, leaving a residual.
Educational content only. This is not financial, investment, legal or regulatory advice. Check the official curriculum for your own exam before relying on any definition here.
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