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The Pricing of Options and Corporate Liabilities

Fischer Black and Myron Scholes
Journal of Political Economy
Vol. 81, No. 3 (May - Jun., 1973), pp. 637-654
Stable URL: http://www.jstor.org/stable/1831029
Page Count: 18
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The Pricing of Options and Corporate Liabilities
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Abstract

If options are correctly priced in the market, it should not be possible to make sure profits by creating portfolios of long and short positions in options and their underlying stocks. Using this principle, a theoretical valuation formula for options is derived. Since almost all corporate liabilities can be viewed as combinations of options, the formula and the analysis that led to it are also applicable to corporate liabilities such as common stock, corporate bonds, and warrants. In particular, the formula can be used to derive the discount that should be applied to a corporate bond because of the possibility of default.

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