The FairPut Initiative
- Thread starter thecoder
- Start date
If the BSM model is right then it has to function also with such high r=25%.
Since it doesn't, then it's wrong.
Q.E.D.
Btw, even such basic logic seems not your strength, you poor old man...
What do your kids say? 
Updated / fixed version:
Here's the proof that BSM is wrong:
BSM(S=100, K=100, t=1, s=0.001%, r=25%, q=0%):
CALL=22.1199, PUT=0
This means: say we have a company where the volatility is nearly 0% (ie. 0.001%) and it earns 25% p.a.
So, after the year the expected stock price will be (at least):
100 * exp(0 * 0.00001 * 1 + (0.25 - 0) * 1) = 128.4025
Ie. applying the formula: S * exp(z * s * sqrt(t) + (r - q) * t) by using z=0 for getting the expected spot, ie. the mean spot at expiration.
So, the CALL will have made 128.4025 - 100 - 22.1199 = 6.2826
This is IMO an arbitrage in the BSM pricing model,
because the CALL premium should rather be 28.4025 instead of the 22.1199.
Setting r higher gives even more arbitrage!
Q.E.D.
PS: this works the same also with normal, higher volatilities.
I chose volatility s=0.001% intentionally to simplify the calculations.
PS2: for those having difficulties understanding the "r as earnings": just think of it as the more commonly used term "risk-free rate"...
PS3: this result shows that whenever r is different from 0, then there is inherently arbitrage in the BSM model!
And: IMO, even for r=0 the BSM is wrong!
.
Why are you supplanting vol for rates? Options are vol. You're assigning zero vol and 25% RFR?
If the BSM model is right then it has to function also with such high r=25%.
Since it doesn't, then it's wrong.
Q.E.D.
Btw, even such basic logic seems not your strength, you poor old man...
You're using a 0 vol-line. Zero.
And?
And?
Your exposure is all rho. The pricing is correct. You're wrong in the head and quite suitable for Trump's next Fed Chair.
@destriero, you are risking to be banned... last warning! Either you are constructive and on-topic, or I've to report your crap snippet postings that have no logic in them, as usual with you.
DON'T SPAM MY JOURNAL! YOU SOB! GO BACK TO YOU OWN USELESS JOURNAL!
You are now in my ignore list.
If you still spam my journal then you will be reported.
DON'T SPAM MY JOURNAL! YOU SOB! GO BACK TO YOU OWN USELESS JOURNAL!
You are now in my ignore list.
If you still spam my journal then you will be reported.
Last edited:
Dude, you're fucking wrong. Ask why the call is correctly discounted from your "fair value" figure and then.... [redacted].
Last edited:
At expiry the call will be worth 28.4025. What's that worth today? The discount factor is 1.284025, so the call is worth 28.4025/1.284025 = 22.1199.Updated / fixed version:
Here's the proof that BSM is wrong:
BSM(S=100, K=100, t=1, s=0.001%, r=25%, q=0%):
CALL=22.1199, PUT=0
This means: say we have a company where the volatility is nearly 0% (ie. 0.001%) and it earns 25% p.a.
So, after the year the expected stock price will be (at least):
100 * exp(0 * 0.00001 * 1 + (0.25 - 0) * 1) = 128.4025
Ie. applying the formula: S * exp(z * s * sqrt(t) + (r - q) * t) by using z=0 for getting the expected spot, ie. the mean spot at expiration.
So, the CALL will have made 128.4025 - 100 - 22.1199 = 6.2826
This is IMO an arbitrage in the BSM pricing model,
because the CALL premium should rather be 28.4025 instead of the 22.1199.
Setting r higher gives even more arbitrage!
Q.E.D.
PS: this works the same also with normal, higher volatilities.
I chose volatility s=0.001% intentionally to simplify the calculations.
PS2: for those having difficulties understanding the "r as earnings": just think of it as the more commonly used term "risk-free rate"...
PS3: this result shows that whenever r is different from 0, then there is inherently arbitrage in the BSM model!
And: IMO, even for r=0 the BSM is wrong!
.
Sometimes everyone else really is wrong, but in general if you find you disagree with the entire world, you might want to entertain the possibility that there's something you don't understand.