Derman and Taleb's The Illusions of Dynamic Replication: A Comment

Doriana Ruffino and Jonathan Treussard ()
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Jonathan Treussard: Boston University, Department of Economics

No WP2006-019, Boston University - Department of Economics - Working Papers Series from Boston University - Department of Economics

Abstract: While as a matter of pure chance and mathematical manipulations, the Black- Scholes formula could have been accidentally obtained much earlier by making use of put-call parity, a simple thought experiment demonstrates the inconclusiveness of any such derivation as regards the validity of the resulting pricing equation. In particular, the use of a non-stochastic discount rate common to both the call and the put op- tions is inconsistent with modern equilibrium capital asset pricing theory. Additional observations are made.

Pages: 05 pages
Date: 2006-03
New Economics Papers: this item is included in nep-dcm
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Journal Article: Derman and Taleb's 'The illusions of dynamic replication': a comment (2006)
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