Wednesday, April 30, 2008

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

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