Black-Scholes Extensions: The Merton Model

A number of adjsutments have been made to the basic Black-Scholes formulas, in order to apply the pricing methods to options on various underlying assets. Robert Merton derived a method of pricing options on stocks, or stock indexes, which pay a continuous dividend yield. We look at the adjustments that Merton made to the original Black-Scholes formula, and demonstrate how the model is used to price a call option.