Black Scholes

>>1665600
What is wrong with it fampachi?

>>1665621
>hurr let's model option prices with heat equation

Did anyone ever at one point think this would be a good idea?

>>1665635
Why is it a bad idea?

>>1665635
>hurr let's model option prices <differential equation> like nearly everything else in the world
>>/r9k

>an equation makes my philosophy true

>>1665600
Engineer here.

What do sigma, S, V, and r represent? Also what domain does this PDE operate on? Can I use finite elements to model it?

>>1665707

S the price of the stock
V(S,t) the price of a derivative as a function of time and stock price.

it's the heat diffusion equation applied to stock options, a corollary of the first law of thermodynamics

>>1665707
>engineer here
>too retarded to google so spoonfeed me pls

sounds about right

didn't take into account enough factors I guess

>>1665822
Heat diffusion usually operates on an irregular, bounded domain. What does this operate on? Also what about r and sigma?

>>1665842
>hurr why can't you read minds
Do you even FEM/ FDM bro

>>1665707
>engineer here
>doesn't understand pdes

I always forget that most engineers don't get past intro to odes

>>1666046
Wrong on both counts. Got any other good memes to share?

>>1665635
And whats wrong with that?

Waiting for actual reply. It's completely possible that the heat equation and options prices are abstractly representing the same phenomenon, that's how math works. Tell me why it's "retarded".

>>1666062
lol baby engineering student confirmed

How's intro to ode?

>>1665600
It's not retarded at all, you probably just don't understand it (or mathematics) very well.

This is from the wiki page on it:
>"The key financial insight behind the equation is that one can perfectly hedge the option by buying and selling the underlying asset in just the right way and consequently "eliminate risk". This hedge, in turn, implies that there is only one right price for the option, as returned by the Black–Scholes formula."

There's the mindset behind using the formula.

Also check out this page: (if you can't see how it relates then you need to take more mathematics courses at uni)
>https://en.wikipedia.org/wiki/Feynman%E2%80%93Kac_formula

>>1665600
let's price options based on historical volatility

nobel prize plz :3

>>1665600
>>1666467
The equation itself is not retarded, and is a useful tool.

However the idea that it eliminates risk is retarded, as proven by the collapse of Long Term Capital Management.

>>1666511
it makes zero sense to price future risk based on historical market volatility. the only reason why they say "herp derp it works" is because the equation quickly becomes more expensive after market volatility has increased from shit hitting the fan

it makes me mad that black scholes equation even exists. it's dumb boomer shit

>>1666511
LTCM failed due to the 98 Russian Ruble collapse coupled with the 97 Asian financial crisis. They did not fail due to B-S not eliminated risk, it failed because those two events happening one year apart was an event that was not possible within the model. I can go deeper into detail about arbitrage and high-frequency trading playing into LTCM's demise if you don't buy what I'm selling.

>>1666046
Profesional chemical engineer here, have never used odes in the past 10 years....

>>1666522
Who do you think makes the most money in the markets these days? HFT firms do lad.

How do you think they make money? They trade via algorithms that execute orders in milliseconds.

How do you think these algorithms decide what to trade and when? They are back-tested against historical data to prove that they are capable of satisfactory returns.


I understand that you were probably taught in undergrad this exact phrase, "historical market data does not predict future market returns," but if you have thousands of algos all backtested on the same sets of historical data and trading off of each other then that makes that quote incorrect. "Dumb boomer shit" is thinking that the market is completely unpredictable and you'd be best to invest in a diversified portfolio of bonds and index-tracking ETFs. That's a quick way to limit returns and absorb as much loss and risk as possible.

>>1666533

they started a new fund based on a less risky LCTM strat version and blew up in 2007

>>1666567
Were you too young back in 07 to realize what was happening to global financial markets? Again, these events were not possible within the model. Black-scholes does not predict or eliminate systematic risk, only non-systematic risk.

>>1666587

>implying systemic risk isn't priced in and doesn't influence

>all this nerd shit meanwhile underage kids being millionare from shitty youtube videos
just lol at this life