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

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  • Doriana Ruffino

    ()
    (Boston University, Department of Economics)

  • Jonathan Treussard

    ()
    (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.

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Bibliographic Info

Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number WP2006-019.

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Length: 05 pages
Date of creation: Mar 2006
Date of revision:
Handle: RePEc:bos:wpaper:wp2006-019

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