Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : Intel Corporation (INTC) -- Ignore unavailable to you. Want to Upgrade?

To: GVTucker who wrote (179990)	12/22/2004 6:35:05 PM
From: Saturn V	Read Replies (2) \| Respond to of 186894

Ref <I >Merton was not part of the development of the Black-Scholes model The Nobel prize committee does not agree with you, since the Nobel prize for the development of the Black-Scholes model was awarded to Scholes and Merton. ( Black passed away before the prize was awarded). The Nova transcript clearly defines Merton's role in the development of the Black-Scholes model. Ref Using the concept of dynamic hedging from Black-Scholes is very different than using Black-Scholes. And dynamic hedging is a concept arose out of the model, there's nothing in the model that addresses dynamic hedging. The earlier part of the transcript clearly implies that dynamic hedging is clearly a part of the Black-Scholes model and its proof. I have not seen the detailed proof and development of the model to pass judgement, but the implication of the transcript is that dynamic hedging is a part of the model. " By allowing them to hedge their risks constantly, the traders could feel safe enough to conduct business on a scale they had never dreamt possible. The risks in stocks could be hedged against futures, those in futures against currency transactions and all of them hedged against a panoply of financial derivatives - so called because they "derive" their value from some other security. Derivatives, which include options, swaps, and futures, took on new forms to exploit Black-Scholes - transferring risk from those who did not want to bear it to those who were prepared to take it on and earn a profit. STAN JONAS: The basic dynamic of the Black-Scholes model is the idea that through dynamic hedging we can eliminate risk." However the basic problem with using the Black-Scholes modeol is the assumption that volatility in the future will be the same as the volatility in the past. As LCTM found out the volatility changed, and their strategy fell apart because the market did not behave the same as in the past. Computers and mathematical models are just as good as the underlying assumptions.If everyone else is using the same tools, a slight change or error in assumtions can have disastrous consequences as happened to LCTM. A portfolio manager who managed some of my money was using a hedging strategy on options based upon historical data. Unfortunately in practice the actual volatility was never same as the historical volatility, and he made more money for the brokerage house than for me, and I withdrew my money.