Econ102-discussion

Econ102-discussion - Fatal Shore -- Black- Scholes and High...

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Unformatted text preview: Fatal Shore -- Black- Scholes and High Finance Tom Carter Fall, 2008 Stock tip: Surest way to make money in the stock market? Stock tip: Surest way to make money in the stock market? Buy low, sell high! High fnance tip: Surest way to make money in high fnance? High fnance tip: Surest way to make money in high fnance? Invent new fnancial instruments even you dont understand. Wait For them to blow up in your Face. Get bailed out by the taxpayers. High fnance tip: Surest way to make money in high fnance? Invent new fnancial instruments even you dont understand. Wait For them to blow up in your Face. Get bailed out by the taxpayers. ( Note: see S&L bailout in late 80s, and current trillion $ bailout . . . ) This is sort of a joke :-) This is sort of a joke :-( This is sort of a joke :-( only not so funny, given todays Fnancial world . . . Black- Scholes Options Pricing Model An axiomatized approach to determining the value of a Fnancial derivative. Vastly increased the development of new Fnancial derivatives. Led people to the idea that they could more directly quantify risk, And thus, to hedging models and derivatives. But . . . lets look briefy at some oF the axioms There is a completely saFe ( e.g., DIC insured savings account ) xed rate asset available. There are Frictionless markets ( i.e., we can buy or sell any instrument at any time in any amount ) . There are no transaction costs. No arbitrage ( there are no nancial instruments that provide risk Free prots above the xed rate asset ) . Do any of these axioms hold in the real world? There is a completely safe ( e.g., FDIC insured savings account ) xed rate asset available. There are frictionless markets ( i.e., we can buy or sell any instrument at any time in any amount ) . There are no transaction costs. No arbitrage ( there are no nancial instruments that provide risk free prots above the xed rate asset ) . Id say, no . . ....
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This note was uploaded on 01/02/2012 for the course FINANCE 347 taught by Professor Bayou during the Fall '11 term at NYU.

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Econ102-discussion - Fatal Shore -- Black- Scholes and High...

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