The primary differential equation used to determine the appropriate price or theoretical value of an option on the basis of a neutral hedge created with risk offsetting positions in the option and the underlying. Parameters or inputs to the equation are limited to: spot price of the underlying, strike price of the option, interest rate, time until option expiration, and volatility of the underlying. The elegance and simplicity of the Black-Scholes model and its consistency with the capital asset pricing model of portfolio theory are responsible for its widespread adoption. The model's weaknesses are its restrictive assumptions. It requires modification or the use of alternative formulations in many real world circumstances. The Black-Scholes equation for the fair value of a European call option on a nondividend paying stock is
 See also Delta (1) (diagrams), Fair Value of an Option. *Fischer Black and Myron Scholes, 'The Pricing of Options and Corporate Liabilities.' Journal of Political Economy 81 (May 1973), pp. 637-654
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