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It does seem that Black-Scholes cannot apply here. I think the main issue is timing the strike: for a normal option, if it is ever in the money, it will get exe
by exmadscientist 6y ago
It does seem that Black-Scholes cannot apply here. I think the main issue is timing the strike: for a normal option, if it is ever in the money, it will get exercised. For a "portfolio insurance" argument, it seems like we don't really care if the portfolio is down 99.9% for only a single day in the 20 year timespan. But neglecting that possibility would be ruinous to someone underwriting a normal option.
- nyc 6y agoI know very little about finance but I did notice that the author specifically notes that the insurance is the same as an European put option (ie can only be exercised at expiry), to which Black-Scholes can be applied.
- exmadscientist 6y agoI knew that overlooking the word "European" which I did not understand would be a mistake. Thank you.