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Re:Risk over Time by exmadscientist on Sunday February 21, 2021 @01:51AM (#26211428)
It does seem that Black-Scholes cannot apply here. I think the main issue is timing the strike: for a normal option, if it is ever in the money, it will get exercised. For a "portfolio insurance" argument, it seems like we don't really care if the portfolio is down 99.9% for only a single day in the 20 year timespan. But neglecting that possibility would be ruinous to someone underwriting a normal option.
Re:Risk over Time by nyc on Sunday February 21, 2021 @03:36AM (#26211875)
I know very little about finance but I did notice that the author specifically notes that the insurance is the same as an European put option (ie can only be exercised at expiry), to which Black-Scholes can be applied.
Re:Risk over Time by exmadscientist on Sunday February 21, 2021 @03:21PM (#26216783)
I knew that overlooking the word "European" which I did not understand would be a mistake. Thank you.