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Derman and Taleb's 'The illusions of dynamic replication': a comment

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  • Doriana Ruffino
  • Jonathan Treussard

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.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Quantitative Finance.

Volume (Year): 6 (2006)
Issue (Month): 5 ()
Pages: 365-367

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Handle: RePEc:taf:quantf:v:6:y:2006:i:5:p:365-367

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Cited by:
  1. Nassim N. Taleb, 2014. "Risk Neutral Option Pricing With Neither Dynamic Hedging nor Complete Markets, A Measure-Theoretic Proof," Papers 1405.2609, arXiv.org.

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