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None of the inputs to the BS model are forecasts, except the volatility. What the BS model allows, then, is trading this volatility. (Just as other financial pr
by FabHK 6y ago
None of the inputs to the BS model are forecasts, except the volatility. What the BS model allows, then, is trading this volatility. (Just as other financial products require other inputs, and thus make them, in a sense, tradable: Cross currency swaps make the cross currency basis tradable, credit default swaps make credit risk tradable, trading index vol versus single stock vol makes correlation tradable, etc.)
- whatever1 6y agoThe only thing it offers, is a common denominator for trading. The value predicted by the model itself is completely arbitrary. You have no clue today about tomorrows volatility or the the interest of a “risk free” instrument aka the central banker can show up tomorrow announcing -10% interest rates. Btw when interest rates went negative for the first time, many trading shops were caught pants down, because of course their models did not have a provision for negative interest rates.