Is Black-Scholes the Right Option for Options?

"There are stochastic volatility models out there to overcome this problem."

I see you've read the SABR paper :)
 
Quote from patefern:

In the book "The Business of Options" Martin O'Connell tells about an options seminar he spoke at and one of the speakers was Myron Scholes. Dr. Scholes was giving his presentation and during it one of the participants kept hassling him, finally saying "Your model is just plain wrong." Dr. Scoles dryly answered "Of course, it's wrong. That's why we call it a model."
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Interesting. The model really should be called the Black model (leave out the scholes). Black was the brains behind this not scholes. Or, the Black-Merton model.
 
Quote from sle:

"There are stochastic volatility models out there to overcome this problem."

I see you've read the SABR paper :)
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And also Alan Lewis' book. I just wish I have more time for reading.
 
I remember NOVA created a great 60M video called "Trillion Dollar Bet" a while back. It was an informative program about Fisher Black and Myron Scholes and how they came up with the Black-Scholes formula and also their involvement with LTCM and its failure.. I am sure most libraries probably carry a copy of that video if anyone is interested in seeing it..
 
Quote from McCloud:

nitro,

You also may want to dig through wilmott forum. There maybe lots of interesting discussions about SABR and BS..

http://www.wilmott.com/index.cfm
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McCloud,

Thanks! That's where I found it!

Do you know if someone has written a small program with sample data so that I can follow along and see if I understand the model?

Or equivalently, some data and what the smile/skew curve would look like ? (assuming given the inputs of alpha, forward, k, beta, volvol, rho and time)

nitro
 
I have a small spreadsheet I wrote to test it - i will look if i can find it.
The great thing about SABR is the stability of vega hedges - some nameless company (starts with N and ends with A) made a lot of money using SABR.
 
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