Options Premium Valuation C

Law of Options Premium Valuation


Law of Options Premium Valuation

We adduce the current standing of the English Law on honesty before drawing an analogy to law of options premium valuation.

Common Law and Legislators into Law of Options Premium Valuation

Firstly, there is bona fide honesty. When there is no meeting of the minds of honest contracting parties, outcome is ruled as a mistake, where contracting parties are allowed to rescind the contract. There is no claim from either side as the courts ruled no contract.

Secondly, some form of dishonesty involved, i.e. telling a part truth, or withholding information so as to extract advantage during contract. The courts would rule it as misrepresentation. The remedy for innocent party included compensation on damages, or rescission. The legislators also recognize this form of low level of “honesty” that they passed a Misrepresentation Act, which can be found in laws of commonwealth countries.

Lastly, the most serious is intentional dishonesty. The courts frowned upon these and are willing to accept compensation bordering speculative amounts. The courts would allow aggrieved party can be compensated for losses and including expected profits. Expected profits could be considered speculative, consider the analogy that I am sure of my future profits from stock market in today’s profit forecast.

Academic Law into Law of Options Premium Valuation

Professor Ewan McKendrick, also a Barrister, in his book on Contract Law wrote that honesty is not absolute. For instance, generally, there is no duty to disclose material facts but if any information is disclosed, it should not be mere half truths.

I agree with Professor Ewan McKendrick that there is generally no requirement on level of honesty, and disclosing too much i.e. too honest, could undermine competitive advantage of businesses and perhaps personal credibility. Honest disclosures could interfere with normal course of business.

Law of Options Premium Valuation

Corollary to Law development, options premium valuation is subjected to simply greed and fear. The mathematical models developed like Black Scholes Merton model, for instance, requires an assessment by counterparties as to the validity of assumptions. Simply, rubbish in rubbish out, but the process of computation is well defined.

Law of Options Premium Valuation

The options buyer shall treat every option in the market like a judge evaluating the merits of the case in front of him. The bid and ask queue is like barristers arguing for and against. There is no requirement for honest disclosures from either party. Think with the objectivity of the judge in the court of Law.

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