Pricing European Style Equity Options

Abstract

The Black-Scholes option model created a revolution in finance. It was perceived that the model opened up a methodology to price option contracts. The methodology has been problematic as numerous empirical contradictions and anomalies have been noted. Harris, in a 2014 article, argued that Black-Scholes along with the Capital Asset Pricing Model and Arbitrage Pricing Theory had a subtle error in their proofs. A general framework for American and European style equity options is presented along with a specific model to price European style options.