Question

Black Shoals Option pricing model. The BSM model is a powerful tool to find the value...

Black Shoals Option pricing model. The BSM model is a powerful tool to find the value of options and has allowed for the advancement and the trading of options every day and around the world. Of course, with every advance in modern financial theory, there are some that have doubts about the outputs of certain models.

Are the mathematics behind the BSM (Black Scholes) model valid for real-life trading? Why, or Why not.

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

One of the important mathematics assumptions in BSM model is Returns of underlying are Normally Distributed.

For Real-life, stock returns are not exactly normally distributed. Thus, the primary mathematical assumption for BSM Model is not valid for real-life

Apart from this, BSM assumes no transaction costs and taxes which isn't valid for real-life trading. Also, it has unrealistic assumption that stocks do not pay any dividends.

Also, other BSM assumptions are unrealistic:

BSM assumes efficient markets

Volatility of stock is known and constant (In real-life trading, Volatily of stock cannot be constant nor known in advance)

Thus, mathematics behind BSM model are invalid for real-life trading.

Thumbs up if you liked my solution. Thanks :)

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Is the BSM(Black Scholes) model the most widely used model for Option Pricing? Or, is there...
Is the BSM(Black Scholes) model the most widely used model for Option Pricing? Or, is there an alternative model more widely used in practice? If so, what is it?
Using the model proposed by Lafley and Charan, analyze how Apigee was able to drive innovation....
Using the model proposed by Lafley and Charan, analyze how Apigee was able to drive innovation. case:    W17400 APIGEE: PEOPLE MANAGEMENT PRACTICES AND THE CHALLENGE OF GROWTH Ranjeet Nambudiri, S. Ramnarayan, and Catherine Xavier wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be...
Sign In INNOVATION Deep Change: How Operational Innovation Can Transform Your Company by Michael Hammer From...
Sign In INNOVATION Deep Change: How Operational Innovation Can Transform Your Company by Michael Hammer From the April 2004 Issue Save Share 8.95 In 1991, Progressive Insurance, an automobile insurer based in Mayfield Village, Ohio, had approximately $1.3 billion in sales. By 2002, that figure had grown to $9.5 billion. What fashionable strategies did Progressive employ to achieve sevenfold growth in just over a decade? Was it positioned in a high-growth industry? Hardly. Auto insurance is a mature, 100-year-old industry...
Delta airlines case study Global strategy. Describe the current global strategy and provide evidence about how...
Delta airlines case study Global strategy. Describe the current global strategy and provide evidence about how the firms resources incompetencies support the given pressures regarding costs and local responsiveness. Describe entry modes have they usually used, and whether they are appropriate for the given strategy. Any key issues in their global strategy? casestudy: Atlanta, June 17, 2014. Sea of Delta employees and their families swarmed between food trucks, amusement park booths, and entertainment venues that were scattered throughout what would...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT