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Why Black–Scholes Works (and Doesn’t)
Derive the Black–Scholes framework from no-arbitrage reasoning and examine why it remains useful despite unrealistic assumptions.
Prerequisites: Familiarity with option payoffs, replication, and binomial pricing; volatility concepts are helpful; no stochastic calculus needed
- Dynamic replication and delta hedging
- Risk-neutral valuation and Black-Scholes inputs
- Implied volatility, smiles, and skews
- Model assumptions and practical limits