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Black Scholes isn't a bad approximation for pricing short term call options that are either in-the-money or not too badly out of it. For anything else, the ass
by joker3 7y ago
Black Scholes isn't a bad approximation for pricing short term call options that are either in-the-money or not too badly out of it. For anything else, the assumptions that go into it mean that it's wildly inappropriate. It needs to go away, and if this is the final nail in the coffin, then that's a good thing.
- rdm70 7y agoMaybe I agree if by go away you mean don't really use it for pricing derivatives for real. However it's still a very useful intellectual tool to understand how to generate a price for a very simple derivative. As an analogy in high school physics they give you a problem like someone 2 meters tall shoots a gun and the bullet is moving so many meters per second, how far does the bullet go before it hits the ground. You use your formula for gravitational acceleration and figure it out, and Yeah! you get the right answer. But you can't use this formula if you really want to calculate how far the bullet goes. You have to take into account air resistance and then you need differential equations and you probably need to approximate an answer with a PDE solver. That's just the difference between a tool to explore foundational concepts and something that attempts to be actually be useful in the real world...