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04/13/2016

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More good stuff Dan. The less-seasoned would do well to put this series on their "must-read" lists; maybe you can expand it to a short e-book.

I will offer one observation: unless they have a STEM background, don't bother trying to explain Black-Scholes values of options to executives.

Tony,

Good point on Black Scholes. I am hoping to get into that as well as other common methods of determining dollar value in my next post on April 25, 2016.

Robert Merton in his analysis of Black Scholes actually used rocket science, which may explain why it is not readily understood by most people. \

(http://www.pbs.org/wgbh/nova/transcripts/2704stockmarket.html)

"NARRATOR: In constructing his own complex mathematical models, Merton explored theories no one in finance had even heard of. Turning to rocket science, he studied the theories of a Japanese mathematician, Kiyosi Ito, who'd faced a similar problem to Black and Scholes. In order to plot the trajectory of rockets, you needed to know exactly where the missile was, not just second by second, but literally all the time. Ito had developed a way of dividing time into infinitely small parcels, smoothing it out until it became a continuum so that the trajectory could be constantly updated. Bob Merton adapted this idea to the Black-Scholes formula. Using the notion of continuous time, the value of the option could be constantly recalculated and risk eliminated continually."

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