My understanding is that the Black-Scholes formula can be derived via the Capital Asset Pricing Model, I cannot find anything about this on the net. Could someone demonstrate this (in a hopefully not too technical way)?

  • 1
    $\begingroup$ It is in the original Black and Scholes paper (JPE, 1973). It is the familiar dyanmic hedging argument, except looking at the beta of the stock and the "beta of the option", you construct a hedging portfolio such that it's beta is zero. This derivation has been superseded by the other derivation; the hedging portfolio is not only zero beta but atually zero risk. $\endgroup$ – noob2 Sep 6 '17 at 16:12
  • 2
    $\begingroup$ You can also find it in Paul Wilmott's book "FAQs in Quantitative Finance" in the Chapter "Ten Different Ways to Derive Black-Scholes". $\endgroup$ – LocalVolatility Sep 6 '17 at 16:19

Here, in section 8:

"Four derivations of the Black-Scholes Formula", F. D. Rouah (http://www.frouah.com/)

| improve this answer | |

Not the answer you're looking for? Browse other questions tagged or ask your own question.