Question

Is there a definitive mathematical proof that pricing options using mathematical models do work in the...

Is there a definitive mathematical proof that pricing options using mathematical models do work in the markets? If yes, then why do people lose money? If no, then why do people use such models?

Homework Answers

Answer #1

Models work but not everytime-they may work for some time and then not work. Also, there are multiple models to price an option-each one has his or her own model. The model output is very dependent on the parameters that goes inside and everyone might have different views on the parameters. Hence, people are not able to generate profits using models. Additionally, people lose money because the option writers are big Financial institutions and they have a huge control on the market.

People use such models to get a reference or base price for the options or to use scenario analysis for option prices by changing parameters.

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