A model that prices European options on an asset with lognormal returns and constant volatility. Price depends on the spot, strike, time, rate, dividends and volatility.
Where you will meet it
Black-Scholes-Merton model comes up in 14 learning outcome notes across the FRM syllabus.
A few of them:
Measuring Returns, Volatility, and Correlation FRM Part I · Quantitative analysis
“It is the volatility that, put into an option pricing model such as Black-Scholes-Merton, reproduces the option's observed market price.”
Measuring and Monitoring Volatility FRM Part I · Valuation and risk models
“Implied volatility is the volatility that, put into an option pricing model such as Black-Scholes-Merton, reproduces the observed market price of the option.”
Arbitrage Pricing with Term Structure Models FRM Part II · Market risk measurement and management
“Black-Scholes-Merton assumes the underlying has a constant volatility and a lognormal price, and that the riskless rate is constant.”
Portfolio Performance Evaluation FRM Part II · Risk management and investment management
“The value of timing per dollar is that call's price, for example from Black-Scholes.”
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