From Bachelier to Black-Scholes: Jin E.

Zhang 2

Option pricing formula:

1. Louis Bachelier’s (1900) formula

X ~ X ~ X ~
S−K S−K √ S−K
C = SN √ − KN √ + σ τN √
σ τ σ τ σ τ

2. Case Sprenkle’s (1961) formula

X S
~ X ~
ρτ ln K + (ρ + 12 σ 2 )τ S
ln K + (ρ − 12 σ 2 )τ
C = Se N √ − K(1 − Z)N √ ,
σ τ σ τ

where ρ is the average rate of growth of the share price, Z is the degree of risk
aversion.

3. James Boness’ (1964) formula

X S
~ X ~
ln K + (ρ + 12 σ 2 )τ −ρτ
S
ln K + (ρ − 12 σ 2 )τ
C = SN √ − Ke N √ ,
σ τ σ τ

where ρ is expected rate of return to the stock.

4. Paul Samuelson’s (1965) formula

X S
~ X ~
(ρ−w)τ ln K + (ρ + 12 σ 2 )τ −wτ
S
ln K + (ρ − 12 σ 2 )τ
C=e SN √ − Ke N √ ,
σ τ σ τ

where ρ is the average growth of the share price, w is the average rate of growth in
the value of the call.

5. Fischer Black and Myron Scholes’ (1973) formula

X S
~ X ~
ln K + (r + 12 σ 2 )τ −rτ
S
ln K + (r − 12 σ 2 )τ
C = SN √ − Ke N √ ,
σ τ σ τ

References
[1] Bachelier, Louis, 1900, Théorie de la spéculation, Annales de L’Ecole Normale Supérieure 17, 21-86.
[2] Sprenkle, Case M, 1964, Warrant prices as indicators of expectations and preferences, in The random
character of stock market prices, ed. Paul H. Cootner, Cambridge, MIT Press, 412-474.
[3] Boness, A James, 1964, Elements of a theory of stock-option value, Journal of Political Economy, 72,
163-175.
[4] Samuelson, Paul A, 1965, Rational theory of warrant pricing, Industrial Management Review, 6, 13-31.
[5] Black, Fischer and Myron Scholes, 1973, The pricing of options and corporate liabilities, Journal of
Political Economy, 81(3), 637-654.