Black–Scholes model

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Constructing a Market, Performing Theory: The Historical Sociology of a Financial Derivatives Exchange tag-as Black–Scholes model on 6/5/2019, 1:35:26 PM

The History of the Black tag-as Black–Scholes model on 6/5/2019, 1:36:02 PM

In contrast, Black, Scholes, and Merton’s arguments were at their core simple and elegant. If the price of a stock followed the standard model of a lognormal random walk in continuous time, and other simplifying assumptions held (see below), it was possible to hedge any option transaction perfectly. In other words, it was possible to construct a continuously adjusted portfolio of the underlying stock and government bonds or cash that would “replicate” the option: that would have the same return as it under all possible states of the world. Black, Scholes, and Merton then reasoned that the price of the option must equal the cost of the replicating portfolio: if their prices diverged, arbitrageurs would buy the cheaper and short sell the dearer, and this would drive their prices together. 120 tag-as Black–Scholes model on 6/5/2019, 1:50:46 PM

Black-Scholes was really what enabled the exchange to thrive. . . . It gave a lot of legitimacy to the whole notions of hedging and efficient pricing, whereas we were faced, in the late 60s–early 70s with the issue of gambling. That issue fell away, and I think Black-Scholes made it fall away. It wasn’t speculation or gambling, it was efficient pricing. I think the SEC very quickly thought of options as a useful mechanism in the securities markets and it’s probably—that’s my judgment—the effects of Black-Scholes. 121 tag-as Black–Scholes model on 6/5/2019, 1:52:19 PM

An Engine, Not a Camera references Black–Scholes model on 9/30/2019, 5:00:25 PM