The greatest contribution Scholes made to the field of economics and
the world financial market is that which bears his name: the BlackScholes
formula for option valuation, which was published in 1973. Options represent
an agreement in which the trader or investor has the right to buy or
sell an asset at a fixed time in the future; without the BlackScholes
formula, investors lacked a means to accurately determine the value
of the option at that future time. To reduce the risk of great losses,
investors calculated a risk premium; however, there was not an exact
method to determine such a premium. The BlackScholes formula reduced
the complexity of investing in options by showing that risk premiums
are already factored into the price of the stock. Though it was rather
complex and involved many assumptions and restrictions, the BlackScholes
formula made option and derivative trades much more accessible to investors
and was adapted by traders worldwide as the main method for valuing
stock options. Merton later relaxed many of the restrictions to make
the formula applicable to other areas of finance, such as home mortgages,
and to risk management in general.

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