Sorry for being so harsh TinMan. I apologize. You are usually quite reasonable and I am sure I have misread what you have said.You shamed me into updating my thoughts on how to use math to model the real world more accurately: Mathematical Finance.I hope what I have to say is not controversial. I'm no Adam Smith, but I'm just reporting on what I observe.

Just a very simple mathematics if the real stock is S ( t ; mu sigma ) how we see at t payoff of the call or 1) max { S ( T ; mu , sigma ) - K , 0 } or 2) max { S ( T ; r, sigma ) - K , 0 } We are not specify the call premium at t yet we specify date t value of the payoff at T

Huh? What call? What does this have to do with call premia?

QuoteOriginally posted by: MartinghoulHuh? What call? What does this have to do with call premia?Before we decide to think what should be a premium one probably would interested what will be payoff. Thus, we need have a precisely defined payoff and then one probably will think about premium. For example one defines payoff in rolling dice as $1 if outcome will be 5 and 6 ; and - $0.3 for others : 1,2,3,4. The question then can be asked about fair premium. Therefore payoff comes first and premium for this digital is second.

QuoteOriginally posted by: listJust a very simple mathematics if the real stock is S ( t ; mu sigma ) how we see at t payoff of the call or 1) max { S ( T ; mu , sigma ) - K , 0 } or 2) max { S ( T ; r, sigma ) - K , 0 } We are not specify the call premium at t yet we specify date t value of the payoff at TLet me interpret the answer of the 1)-2) problem. For people who strongly believe that 1+1=2 regardless of the supply and demand the correct answer should be 1) and for the people who primary believe in BS and their risk neutral world the correct answer should be 2) because otherwise BS formula does not make sense as far as BS said you at t that payoff would be difference between value of the real stock and K while their formula which they apply states that payoff is 2).

I have absolutely no idea what you're talking about and what any of the things you have said have to do with the subject that's being discussed.

QuoteOriginally posted by: MartinghoulI have absolutely no idea what you're talking about and what any of the things you have said have to do with the subject that's being discussed.The primary idea of my message concerned about to usefulness of mathematics in financial applications. As illustrative example was chosen a very simple and say very fundamental one.It might be good to repeat it. Bearing in mind explanation given above before starting to calculate current date premium we need to know at this day t what will be payoff at t. I hope that there is no objection to this point. By definition it should be 1) max { S ( T ; mu , sigma ) - K , 0 }After that BS tackle with the problem and said that construct a solution of the problem and their price at t implies that payoff at T for the option is 2) max { S ( T ; r , sigma ) - K , 0 }In order to calm down misunderstood folk they said if their solution will be used either buyers and sellers then they could not make money borrowing for risk free interest rate. Then we all became happy for a quite a long period of time.

QuoteOriginally posted by: MartinghoulI have absolutely no idea what you're talking about and what any of the things you have said have to do with the subject that's being discussed.Sigquote!I think list is on about the remarkable notion Black-Scholes and Merton invented in the early 70's. Prior to that, Samuleson almost got there but still thought you had to estimate mu.Ross made the breakthrough in 1978 of realizing how the Hahn-Banach theorem could be used to prove what we now call the fundamental theorem of asset pricing. That useless math crap, again.Life is funny. He is now trying to estimating mu.

Well, the joke's on me then... I thought we were discussing LIBOR term basis and stuff of that sort.

Where's Commander Lighthouse when you need him to control thread drift?

QuoteOriginally posted by: kimosabeWhere's Commander Lighthouse when you need him to control thread drift?Which one? go for Hook Head. A historical teaser ? have you ever wondered where the phrase ?by hook or by crook? comes from?