Most finance textbooks start with the discounted cash flow (DCF) model—project the cash flows, pick a discount rate, and voilà: you’ve got a valuation. It’s neat, tidy, and timeless.

But try applying it to an option and the whole thing falls apart.

Options don’t behave like bonds or businesses. Their value hinges not on steady cash flows but on uncertainty, volatility, and probability. And that’s precisely why the DCF model fails—and why a revolutionary model was needed. Enter the Black-Scholes-Merton model: a groundbreaking approach that reimagined valuation through the lens of hedging, replication, and risk-neutral probabilities.

This post explores why options broke the DCF mould—and how Black, Scholes, and Merton changed finance forever.

The Capital Asset Pricing Model (CAPM) remains a cornerstone of modern finance, showing how risk and return are linked through a single factor: market beta. But real-world investors care about more than just today’s risk—they care about how their investment opportunities change over time. That’s where the Intertemporal Capital Asset Pricing Model (ICAPM) comes in. Introduced by Merton (1973), the ICAPM extends the CAPM’s single-period framework to a dynamic, multi-period world, where investors hedge against changes in income, inflation, volatility, and other economic risks. This post explores how the ICAPM reframes asset pricing, explains anomalies, and offers a more realistic foundation for portfolio construction and long-term investing.

For decades, conventional wisdom has insisted that investors should reduce equity exposure as they age, replacing stocks with bonds to lower risk and secure retirement income. Bonds, after all, are supposed to be the ‘safe’ part of a portfolio—steady, predictable, and protective. But what if that story is not just outdated, but backwards?

A landmark 2025 study by Cederburg, Anarkulova and O’Doherty turns this advice on its head. Using return data from 39 developed countries over more than a century, the authors simulate one million retirement scenarios and reach a striking conclusion: an all-equity portfolio—33% domestic and 67% international stocks—not only delivers higher long-term returns, but also reduces the risk of running out of money in retirement compared to traditional stock-bond mixes. In other words, the asset class long considered the portfolio’s safety net may actually be making retirement less secure.

Yet bonds still have a role to play—not as financial optimisers, but as behavioural anchors. For many retirees, the psychological comfort of owning something stable can be the difference between staying the course and selling out at the worst possible time. The true challenge is not just building a portfolio that performs well on paper, but one that investors can live with when markets test their resolve.

Structured products promise the best of both worlds: stock market upside with limited downside. It’s a compelling pitch, especially in uncertain markets. But beneath the glossy brochures and bespoke payoffs lies a very different story—one where complexity conceals cost, and the bank always wins. These instruments are engineered using a mix of bonds and derivatives, allowing issuers to extract profit through hidden margins and asymmetric risk. Investors are often unknowingly writing options, capping their upside whilst absorbing significant downside risk. As multiple studies show, the expected returns on structured notes are frequently negative once fees and structural constraints are accounted for. For most retail investors, the allure of structured products is an expensive mirage—cleverly designed to benefit the issuer far more than the investor.