Black-Scholes overvaluing/undervaluing?

[rm-22]

Hi,
somewhere I read that Black-Scholes Model would apparently
have a problem of overvaluing deep out-of-the-money calls
and undervaluing deep in-the-money calls.
I'm not sure if that is really the case.
Can someone confirm this, with maybe a practical example?
Thx


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[Dimathematician]

There's nothing wrong with Black-Scholes here. I think what you mean
might be the calculation of deep out-of-the-money call prices from
implied volatilities. The same for in-the-money. Yes there are
numerical issues here, as the precision of the normal cdf gets
worse since it is numerically calculated

2009/9/13 Ralf M. <[hidden email]>

Hi,
somewhere I read that Black-Scholes Model would apparently
have a problem of overvaluing deep out-of-the-money calls
and undervaluing deep in-the-money calls.
I'm not sure if that is really the case.
Can someone confirm this, with maybe a practical example?
Thx


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[Luigi Ballabio]

On Sun, 2009-09-13 at 17:53 +0200, Ralf M. wrote:
> somewhere I read that Black-Scholes Model would apparently
> have a problem of overvaluing deep out-of-the-money calls
> and undervaluing deep in-the-money calls.
> I'm not sure if that is really the case.

Would that be QuantLib's implementation, or Black-Scholes itself?

Luigi


--

Testing can never demonstrate the absence of errors in software, only
their presence.
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