Black Scholes Option Pricing

Since BS is widely recognized and established, largely it is worthwhile to look into implied volatility fudges to accommodate various “imperfections”. This would be ideally suited if the model is to interpreted by humans. If it is pure algo, other methods can be used but also displaying the BS implied vol deviations. The read thing about it is that it has only a few parameters to estimate thus easily comprehendible by the human users.

I have being thinking about this for some time but reading the following post by Paul Wilmott made me accept it to a great extent: http://www.wilmott.com/blogs/paul/index.cfm/2008/4/29/Science-in-Finance-IX-In-defence-of-Black-Scholes-and-Merton

Suminda Sirinath Salpitikorala Dharmasena

Option Gain

For comments on realizing option gains please see: http://newprofessionaldiary.blogspot.com/2008/03/option-gain.html

Suminda Sirinath Salpitikorala Dharmasena

Addisional Comments on Discretising Continuous Time Finance Models Options

This follows the discussion on discreate time models in: http://sirinath.blogspot.com/2008/04/discratising-continuous-time-finance.html

This is more true in high Gamma (convex) portfolios and there is a larger impact than the continuous time model in -ve Gamma (concave) portfolios.

Suminda Sirinath Salpitikorala Dharmasena

Discratising Continuous Time Finance Models

The some pay off structure would be such that a discratised model would make more money practically than the theoretical model continuous time model. If the discratising mechanism is optimized it would outperform the theoretical model in the presence of transaction cost.

© 2008, Suminda Sirinath Salpitikorala Dharmasena