3 ms·

This is a pricing model, i.e. what is the value according to the assumptions the model does (which btw are known to be weak for BS) but as anything else the pri

This is a pricing model, i.e. what is the value according to the assumptions the model does (which btw are known to be weak for BS) but as anything else the price is what you are going to pay in the market for whatever other reasons. Imagine you have a model that establishes the price of used cars, it can be really really good but if you go to the market to buy one you will pay whatever is been asked for not what your model says. EDIT: Although pricing models do not have direct affectation to market prices they do in an indirect manner. To manage risk are needed pricing models which somehow condition market participants and therefore prices indirectly. In the simile with cars, you can buy as many cars as you want at the price you want, but what you do when you have them and if you want to take wise decisions with them you have to know something about their value.

listenallyall 2y ago
Yes, but also no. Because you don't have to buy a mispriced asset (mispriced against you) and also, in many cases, you can construct what you want from pieces of other assets. One car dealer trying to sell a 2023 Honda Accord with 60,000 miles can't just decide, independently, to forget the high mileage and price the car based solely on it being 1 year old. Sure that's "whatever is being asked" but that car will never sell until he brings the price down in line with other 60k mile cars - and that is because the pricing models are essentially agreed upon by all market participants.
- melenaboija 2y ago
  Yes, but also no. The value of things is only what the market wants to pay for it, and it does not matter if it is a 2023 Honda Accord or a financial product, currency... In one you might trust the engine reliability and on the other on the government behind the currency, whoever is writing the option, issuing the bond, ... But still, it is a matter of faith and bid/ask.

listenallyall 2y ago

Yes, but also no. Because you don't have to buy a mispriced asset (mispriced against you) and also, in many cases, you can construct what you want from pieces of other assets. One car dealer trying to sell a 2023 Honda Accord with 60,000 miles can't just decide, independently, to forget the high mileage and price the car based solely on it being 1 year old. Sure that's "whatever is being asked" but that car will never sell until he brings the price down in line with other 60k mile cars - and that is because the pricing models are essentially agreed upon by all market participants.

melenaboija 2y ago
Yes, but also no. The value of things is only what the market wants to pay for it, and it does not matter if it is a 2023 Honda Accord or a financial product, currency... In one you might trust the engine reliability and on the other on the government behind the currency, whoever is writing the option, issuing the bond, ... But still, it is a matter of faith and bid/ask.