Black-Scholes: a navigational analogy

My previous post presumed some understanding not just of the Black-Scholes formula, but also of its derivation; in particular, of the hedging argument whereby the drift in the underlying asset can be ignored. My likely readers at this blog probably do understand this, but some other commentators may not. How to explain?  Here, with some trepidation, is … Read more

No-negative-equity guarantees: Black-Scholes and its discontents

The Prudential Regulation Authority (PRA) has issued a consultation paper CP13-18 on valuation of the no-negative-equity guarantee (NNEG) in equity release mortgages.  I think the use of the Black-Scholes formula in this context is flawed, in ways which are more fundamental than suggested by the PRA’s rather bland observation that “some of the assumptions that allow the mathematical … Read more