Emanuel Derman has stated that “all models in financial economics are wrong”. Ev

Question

Emanuel Derman has stated that “all models in financial economics are wrong”. Evaluate this statement in the context of the Black-ScholesMerton European vanilla option model. Your answer should include the theoretical foundation of the model (e.g., how risk in the underlier is characterised and what this means for option valuation and hedging); and it should critically analyse BSM theory given the findings of empirical research from the market (e.g., what are the findings and what do they mean for valuation and hedging with the BSM model in the market).

Explanation / Answer

In the Black-ScholesMerton European vanilla option model we will find value of the call option and put option for non dividend paying stock.This can be used only for europen style option.

There are many models which works same as Black-ScholesMerton European vanilla option model have discovered before only but none of them came to limelight since the discoveres wants to use it for personal use and make profits.

It works as dynamic hedging than risk since it is not exact model

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