Black-Scholes used in real life?
Hi Jensen,
My understanding is that, despite the criticisms of the assumptions, the Black-Scholes model is used in real life for a wide range of topics in the financial world and you will find numerous books on the subject just by surfing the net. I have just found "Basic Black-Scholes: Option Pricing and Trading" amongst others on Amazon
A model should ultimately be judged on whether it produces accurate results, even, absurdly, if it is based on preposterous assumptions! Of course, there is always going to be a correlation between the accuracy of a model and the realism of its assumptions. I think the main focus of the Black-Scholes model is the constant volatility assumption - this is where investors have had trouble with it in real life.
I believe there is a diagram showing how real-life implied volatilities are not a linear function of the strike price as Black-Scholes suggests they should be. Subject ST6 goes into this a bit deeper, you might like to post your query there?
Good luck!
John