3 ms·
Yes they do. There's enough option pricing that is at least partly based on BS.
by dx034 10y ago
Yes they do. There's enough option pricing that is at least partly based on BS.
- lordnacho 10y agoYes, partly based on, using the lessons from, slight modifications of, and so on. But I've never seen anyone try to claim that the BS formula was enough to give you the right price. And I've traded on more than one derivs desk.
- sedachv 10y agoAccording to what I remember reading in https://mitpress.mit.edu/books/engine-not-camera https://mitpress.mit.edu/books/engine-not-camera before the Black-Scholes formula started being applied by traders, the market prices did not correspond to the prices predicted by the model, because there was no other mathematical model to price options, most of the trading was done based on heuristics, and the market was highly inefficient. For at least the first few years when the Black-Scholes formula first started being used by traders the market converged on the predicted prices. As speculation and arbitrage opportunities were identified, the prices of options diverged from the result of the Black-Scholes formula, and other models were developed, based on the Black-Scholes equation.