Tuesday, March 8, 2011

Damodaran's view on Buffett's view of derivatives!!

Here i go... With the basic understanding of Black-Scholes' option pricing model which under value deep out of the money options and over values the options that are illiquid (as the pricing model assumes continuous prices); (Of course Damodaran too mentions the same), Prof presented a detailed critic of Buffett's recent statement that 'Black-Scholes wildly produces inappropriate values when applied to long-dated-options.

This illustration clarifies many nitty-gritties of B-S option pricing model! [Link]

No comments: