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by IAmGraydon 626 days ago
>In modern finance the Black-Scholes formula is not used to "price" options in any meaningful sense. The price of options is given by supply and demand.

I'm not sure what your point is. Yes, actual market prices are determined by...the market. The Black-Scholes formula is widely used in modern finance to MODEL the price of an option given different sets of inputs in theoretical situations.
2 comments
ncclporterror 625 days ago
The way the article is written, it appears that the formula is used as: 1. Observe market parameters (volatility of the underlying and risk free rate) 2. Plug into formula 3. Deduce a price for the option.

My point is that it is used in the opposite way: observe prices to deduce market parameters. You claim my point is obvious, but I'm not sure it would be obvious to a reader unfamiliar with modern finance reading this article, which is the target audience.

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blitzar 625 days ago
> 1. Observe market parameters (volatility of the underlying and risk free rate) 2. Plug into formula 3. Deduce a price for the option.

In the FX market (interbank), the quoted and "traded" number is Implied Vol - the price of the option then follows from there (via the Black–Scholes model).

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loveparade 626 days ago
And it's a cycle. Supply and demand are partially driven by pricing models used by hedge funds, and variants of Black Scholes is one of those.
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