Pricing Model Limitations

Pricing model limitations refer to the areas where theoretical models like Black-Scholes fail to reflect real-world market behavior. Common limitations include the assumption of constant volatility, the omission of trading costs, and the belief that markets are always efficient.

In crypto, these limitations are particularly pronounced due to liquidity issues, exchange downtime, and regulatory uncertainty. Professionals who use these models must be aware of their boundaries to avoid making dangerous assumptions.

Understanding where the models fall short is just as important as knowing how to use them, as it encourages the use of additional risk buffers and human oversight.