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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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Suggested Citation

  • Doriana Ruffino & Jonathan Treussard, 2006. "Derman and Taleb's 'The illusions of dynamic replication': a comment," Quantitative Finance, Taylor & Francis Journals, vol. 6(5), pages 365-367.
  • Handle: RePEc:taf:quantf:v:6:y:2006:i:5:p:365-367
    DOI: 10.1080/14697680600868283
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    References listed on IDEAS

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    Cited by:

    1. Nassim N. Taleb, 2014. "Risk Neutral Option Pricing With Neither Dynamic Hedging nor Complete Markets," Papers 1405.2609, arXiv.org, revised Oct 2014.

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