The Black model (sometimes known as the Black-76 model) is a variant of the Black–Scholes option pricing model.
In Black model, we:
- Assume no interest rate
- Assume no dividend etc
- Use Future Prices instead of Stock Prices for stock options
- Use Index Prices for index options
This is where Black model is different from Black-Scholes. Black Scholes Options Pricing Model assumes that risk-free rate and volatility of the underlying are known and constant. However, this is not true in real world scenario. RBI for example can change interest rate daily.
According to the theory of Black-Scholes, IV of PE and CE options should be the same. However, in case of ITM strikes
Black’s uses modeling a forward price as an underlier in place of a spot price. So, as per assumption of this model – The Interest Rate, The Dividend rate is always adjusted in futures price. So –
- Use Future Prices Instead of Stock Prices.
- Assume no Interest Rate.
- Assume no dividend etc.