Why We Have Always Used the Black-Scholes-Merton Option Pricing Formula

11 Pages Posted: 11 Mar 2009 Last revised: 6 Apr 2009

See all articles by Charles J. Corrado

Charles J. Corrado

Deakin University - School of Accounting, Economics & Finance

Date Written: April 4, 2009

Abstract

Derman and Taleb (The Issusions of Dynamic Hedging, 2005) uncover a seeming anomaly in option pricing theory which suggests that static hedging based on put-call parity provides sufficient theoretical support to justify risk-neutral option pricing. From this they suggest that dynamic hedging as a theoretical basis for the celebrated option pricing model of Black and Scholes (1973) and Merton (1973), while correct, is redundant [see also Haug and Taleb (Why We Have Never Used the Black-Scholes-Merton Option Pricing Formula, 2009)]. This paper examines the anomaly and finds that put-call parity does not provide a basis for risk-neutral option pricing.

Keywords: option pricing, put-call parity, dynamic hedging, static hedging, Black-Scholes-Merton

JEL Classification: G12, G13

Suggested Citation

Corrado, Charles J., Why We Have Always Used the Black-Scholes-Merton Option Pricing Formula (April 4, 2009). Available at SSRN: https://ssrn.com/abstract=1357125 or http://dx.doi.org/10.2139/ssrn.1357125

Charles J. Corrado (Contact Author)

Deakin University - School of Accounting, Economics & Finance ( email )

221 Burwood Highway
Burwood, Victoria 3215
Australia
61492446214 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1,154
Abstract Views
4,148
rank
24,012
PlumX Metrics