Roger's 1998 Short Picks Message Board

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Strategies & Market Trends : Roger's 1998 Short Picks

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To: Eric Klein who wrote (14527)	10/9/1998 7:04:00 PM
From: BelowTheCrowd	Read Replies (1) of 18691

Yup, the essential truth to Black/Scholes and Merton/Scholes is that they provide the best possible pricing mechanism for derivatives, factoring in all known data about volatility in the underlying asset. The problem is that when volatility changes rapidly, the formulas break down. This is true whether it is a significant increase in volatility (as we have had lately) or a significant decrease. In the former case they'll underestimate risk, in the latter they'll overestimate. mg

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