How close are the option pricing formulas of Bachelier and Black-Merton-Scholes?
AbstractWe compare the option pricing formulas of Louis Bachelier and Black-Merton-Scholes and observe -- theoretically as well as for Bachelier's original data -- that the prices coincide very well. We illustrate Louis Bachelier's efforts to obtain applicable formulas for option pricing in pre-computer time. Furthermore we explain -- by simple methods from chaos expansion -- why Bachelier's model yields good short-time approximations of prices and volatilities.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 0711.1272.
Date of creation: Nov 2007
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Web page: http://arxiv.org/
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