Derman and Taleb's 'the Illusions of Dynamic Replication': A Comment

5 Pages Posted: 23 Mar 2006

See all articles by Doriana Ruffino

Doriana Ruffino

Board of Governors of the Federal Reserve System

Jonathan Treussard

Research Affiliates

Date Written: March 24, 2006

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 options is inconsistent with modern equilibrium capital asset pricing theory. Additional observations are made.

Keywords: Black-Scholes Formula, Option Pricing, Dynamic Replication

JEL Classification: B41, G13

Suggested Citation

Ruffino, Doriana and Treussard, Jonathan, Derman and Taleb's 'the Illusions of Dynamic Replication': A Comment (March 24, 2006). Available at SSRN: https://ssrn.com/abstract=890574 or http://dx.doi.org/10.2139/ssrn.890574

Doriana Ruffino (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Jonathan Treussard

Research Affiliates ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

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