Option Pricing Theory
Categories: Financial Theory, Derivatives
See: Black Scholes. Not the foot powder. Theirs is the best, most broadly adopted option pricing theory, i.e. the theory around what an option on something is worth. See: Call Option. See: Put Option.
Remember: an option is the right to buy or sell a something, for a given period of time, at a pre-set price. So...what's that worth? Lots of ways to think about it, and Black Scholes pioneered the thinking. But they're wrong a lot. And there are new theories coming out all the time about how to better price this multi-trillion dollar market.
Our fave? The blindfolded pin-the-tail-on-the-donkey method.