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micha12
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Applications of the option pricing theory

July 1st, 2009, 11:05 pm

The Black-Scholes option pricing theory has several fields of application.1) The pricing of options (financial contracts) - which is the primary field of application.2) The pricing of corporate liabilities in corporate finance.3) The pricing of the so-called "real-options" (though I am not very familiar with how that works).Are there other fields of application of the theory, both in finance and in the non-financial world?
 
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tw
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Applications of the option pricing theory

July 2nd, 2009, 2:22 pm

4) enabling the continuing employment of quants and financial mathematics academics.QuoteOriginally posted by: micha12The Black-Scholes option pricing theory has several fields of application.1) The pricing of options (financial contracts) - which is the primary field of application.2) The pricing of corporate liabilities in corporate finance.3) The pricing of the so-called "real-options" (though I am not very familiar with how that works).Are there other fields of application of the theory, both in finance and in the non-financial world?
 
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horacioaliaga
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Applications of the option pricing theory

July 7th, 2009, 6:53 pm

Fair value of early terminated trades - Litigation
 
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hayes
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Applications of the option pricing theory

July 8th, 2009, 5:49 am

I'm surprised it's not yet been mentioned but (for completeness) :As well as determining price/ fair value, the BS model will also provide you with the underlying greeks. You can use BS to calculate:-Implied Vol-Vol Smiles-Approximate hedge ratios
Last edited by hayes on July 7th, 2009, 10:00 pm, edited 1 time in total.
 
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micha12
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Applications of the option pricing theory

July 8th, 2009, 10:43 am

QuoteOriginally posted by: hayes-Implied Vol-Vol Smiles-Approximate hedge ratiosWell, those have not been mentioned probably because they fall into group 1).I was interested in "original", non-standard applications the options theory, maybe even those not closely related to the financial field. Or maybe in the financial field, but cases where "options" are somehow embedded somewhere, and people do not even think of them as options, though it can be shown that they can be treated as such.My question could be quite vague, but I hope you understand )
 
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tw
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Applications of the option pricing theory

July 8th, 2009, 3:01 pm

Without giving a facetious answer this time I guess if you take "Black-Scholes option pricing theory" in its most general sense as being ways to calculate the value of max(x-const,0) under different assumptions of a stochastic process or distribution for the independent variable, then this sort of issue comes up in various stochastic controlproblems, although typically embedded in recursive equations.This relates to real options (as you have alluded to) and also to some problems in economics (although I have little or no experience of the latter).QuoteOriginally posted by: micha12QuoteOriginally posted by: hayes-Implied Vol-Vol Smiles-Approximate hedge ratiosWell, those have not been mentioned probably because they fall into group 1).I was interested in "original", non-standard applications the options theory, maybe even those not closely related to the financial field. Or maybe in the financial field, but cases where "options" are somehow embedded somewhere, and people do not even think of them as options, though it can be shown that they can be treated as such.My question could be quite vague, but I hope you understand )
 
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Collector
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Applications of the option pricing theory

July 8th, 2009, 7:46 pm

options embedded in money and in any "physical product" where the government or others guarantee a fixed price...
Last edited by Collector on July 7th, 2009, 10:00 pm, edited 1 time in total.