What is the Black-Scholes model primarily used for in financial economics?

The Black-Scholes model is primarily used for pricing European-style options. This model provides a mathematical framework for estimating the theoretical price of options based on various factors including the underlying asset's price, the exercise price of the option, the time until expiration, the risk-free interest rate, and the asset's volatility.

European-style options can only be exercised at expiration, which aligns perfectly with the assumptions and conditions of the Black-Scholes model. The model assumes that prices follow a log-normal distribution and uses concepts of stochastic calculus to derive a closed-form solution for the pricing of these options.

In contrast, American-style options, which can be exercised at any time before or at expiration, require a different approach to pricing due to the added complexity of potential early exercise. The valuation of dividends is not a primary function of the Black-Scholes model, although adjustments can be made if dividends are relevant. Similarly, calculating interest rates falls outside the primary scope of the Black-Scholes model, as it focuses specifically on options pricing rather than broader financial metrics.