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.
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).
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