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The theory underlying financial derivatives which involves ``stochastic calculus'' and assumes an uncorrelated Log Normal Distribution of continuously varying prices. A simplified ``binomial'' version of the theory was subsequently developed by Sharpe et al. (1995) and Cox et al. (1979). It reproduces many results of the full-blown theory, and allows approximation of options for which analytic solutions are not known (Price 1996).
See also Garman-Kohlhagen Formula
References
Black, F. and Scholes, M. S. ``The Pricing of Options and Corporate Liabilities.''
J. Political Econ. 81, 637-659, 1973.
Cox, J. C.; Ross, A.; and Rubenstein, M. ``Option Pricing: A Simplified Approach.'' J. Financial Economics
7, 229-263, 1979.
Price, J. F. ``Optional Mathematics is Not Optional.'' Not. Amer. Math. Soc. 43, 964-971, 1996.
Sharpe, W. F.; Alexander, G. J.; and Bailey, J. V. Investments, 5th ed. Englewood Cliffs, NJ: Prentice-Hall, 1995.