Black Scholes Pricing Concept
13 Pages Posted: 27 Jun 2015
Date Written: June 25, 2015
Abstract
In some papers it have been remarked that derivation of the Black Scholes Equation (BSE) contains mathematical ambiguities. In particular there are two problems which can be raise by accepting Black Scholes (BS) pricing concept. One is technical derivation of the BSE and other the pricing definition of the option.
In this paper, we show how the ambiguities in derivation of the BSE can be eliminated. We pay attention to option as a hedging instrument and present definition of the option price based on market risk weighting. In such approach, we define random market price for each market scenario. The spot price then is interpreted as a one that reflects balance between profit-loss expectations of the market participants.
Keywords: .Black Scholes, option, derivatives, pricing, hedging.
JEL Classification: JEL : G12, G13
Suggested Citation: Suggested Citation