Have you not yet noticed that this discussion quickly spiraled out of his competence limit? I already told you that he sometimes even cites content that actually weakens his claims. His original premise was that bs is outdated and not used anymore. Then he claimed that lstm used primarily bs and that's why they fucked up. Now he makes full circle and cites an article that rightly supports the fact that bs is still widely used today. Lol
The fact that it is used by too big to fail banks and other unnamed firms "proves" they haven't a clue. Why would you bother bringing that up ..... while avoiding the main point that it isn't a decent framework?
they failed because they overlevered giving credit to people who didn’t deserve it. you keep attributing financial failures to an options model instead of to other more obvious factors.
A number of posters have pointed out that pricing options off anything other than the risk-free rate would allow arbitrage, but I don't think anyone has actually explained that arbitrage to you. If you understood the arb, you would never have asked the question, so here is the explanation: Price an ATM put and call (same expiry and underlying). Then simulate selling the call and simultaneously buying 100 shares of the stock, financed at the current risk-free rate, and buying the put. Then check what happens at expiry. You will find that in all situations, you have made money from the excess differential between the (overprices) call and the (comparatively underpriced) put. Before you delve into the intricacies of BSM, and way before you dive into Shreve (not an undergraduate text!), you should learn about put-call parity and other basics.
Just curious what you think of Shreve's books? A bit dated but he has imo a talent to explain concepts very elegantly.
He's your former professor at CMU, right? It's a good book. IIRC it was published in 2005 or 2006. I'd say it's held up pretty well. Just not suitable for someone still struggling with the concept of put-call parity.
Well said, Kevin. Put-call parity makes no assumption about return distribution, mean, volatility, and all that stuff. There is nothing to be confused about.
Agree on suitability for OP. I addressed it to @newwurldmn Let's just say I know Dr. Shreve personally and hold him in very high regard. He was instrumental in shaping my early career.