Black distrusted the replication method’s exact hedge throughout his career.

Evidence

Emanuel Derman, who worked closely with Black at the investment bank Goldman Sachs, recalls Black becoming “quite excited” when a simulation with which Derman was experimenting seemed to show that Merton’s continuously adjusted hedge did not yield precisely the Black-Scholes price of an option. According to Derman, Black “said something like, `You know, I always thought there was something wrong with the replication method.”’ It turned out that the discrepancy arose because of error in the simulation, but, says Derman, “in his heart … Fischer [Black] mistrusted the Merton derivation and preferred his original proof” (Derman 2004, pp. 170-171). — Donald MacKenzie, An Engine, Not a Camera, 603

Categorization

• XREF: Derman’s memoir testimony; relevant to how the model traveled into practice at Goldman, where discrete rebalancing was the actual reality.