Theory and Reality Are Different

“All right, then shall we see where this Black–Scholes equation comes from?”

Dad picked up his pen again.

“As for how stock prices move… it starts with geometric Brownian motion from physics. Smart A-yeon obviously knows that, right?”

“Yep! I know!”

I quickly nodded.

“It comes out like this, right?”

Swish-swish-.

I wrote the equation on the paper.

dS = μS dt + σS dW

“You use a multiplicative form because the price can't fall below zero. The first term is the direction it drifts on average, and the second is the part that shakes around randomly.”...