Hahahahahaha! Or should that be sob sob sob sob!? And to think I spent all that time memorising enron and sunbeam…
What is your issue with BSM? It’s a model to price European derivatives in continuous time. Assumptions are relatively straightforward: Known (and constant) risk free rate Known (and constant) volatility European options Prices are lognormal (I think?) No dividends etc. Schweser specifcally say that it appears candidates do not have to use / know the actual formula. It looks hard if you don’t have a background in mathematical fiannce etc but we don’t appear to have to do much with it. I assume a question would be around when it is appropriate to use / the assumptions /which ones can be altered etc.
I agree with Hurricane. Not a difficult LOS. LOS only asks to explain underlying assumptions and limitations of BSM. Understanding those and the Greeks (also straightforward) for the exam s/b sufficient. Greeks - measure the sensitivity of option price to changes in BSM model inputs: - Asset price (Delta) - Volatility of underlying asset returns (Vega) - Risk-free rate (Rho) - Time to expiration (Theta) These last three are easy to remember since the Greek starts with the same letter as the input.
You mean I don’t need that ridiculous formula which I just committed to memory!?
Nope, but you do need to know Pi out 20 decimal places.
^^ But if you know avogadro’s number out to 10 places then you do not need to know pi.