<t>Markowitz and Sharpe are far smarter than I can even comprehend. I mean them no disrespect. The CAPM, however,is nothing more than a philosophical abstraction. Who could disagree with the notion that investors should rank investments on an efficient frontier using historical return divided by the...

<t>Arbitrage models can help one identify mispricing or fair pricing under some conditions. Equilibrium prices, assuming they really exist, provide guidelines for closing out a position given that the trade is actually mis-priced.I think the notion of equilibrium prices, in the real world, relies on...

Can you cite examples of assymetrical distributions?

<t>Thank you for the responses. I erred when I wrote that early exercise is never optimal. What I should have written is that it's never optimal except as a dividend capture strategy. How common is it that the dividend exceeds the cost of carry? How does one quantify the execution risk of the transa...

<t>Put/Call parity relationships hold for all options. Reversals and conversions are simply forms of lending and borrowing. Early exercise potential changes the interest rate payoff patterns from borrowing and lending, and , hence , the fair value of the reversal or conversion. Trading deep in the m...

Derman has given some interesting talks on the future of quantitative finance. You can download these presentations from his web site. This will probably help to define the terms of your discourse.

Go to the web site for prime anlaytics, LLC. this is the state of the art system. It's reasonably priced, portable and flexible. I have used this system as a market maker for the past 8 years. many clearing firms use it also.

<t>You are absolutely right-on in your assessment of fair value. Options are insurance contracts and as such their prices must reflect an insurance risk premium in addition to a notion of theoretical value; Why is their such a disconnect between the notion of an option price reflecting the cost of i...

<t>Floor traders typically hedge convexity risk by spreading from option to option. The QQQ's are at least a nickel wide, always. Who are you trying to kid?You can't hedge gamma without gamma. If you're short cheap gamma, rarely the case in the QQQ's you'd get killed trying to manage your deltas sim...

<t>Every trader makes a determination of fair value continuously. Know knowledgeable market participant would deny that. My question pertains to fair value, when fair value is posited as the solution to a mathematical equation. Traders are given prices in liquid markets, respond to the prices and le...

<t>Technical analysis is here to stay and is used by many market participants in all markets. Another interesting question is, What are the implications for brownian motion based models , if the rate of return of the underlying asset isn't IID, per assumption? TA is but another tool for analyzing ma...

Thanks. I will definitely follow up.

<t>Thank you for your thoughtful response. How can one approximate a convex payoff function with a sequence of linear functions? My experience leads me to believe that it can't be done with any consitency.If options are insurance contracts, even in a risk neutral world w/o transactions costs, where ...

Baldy is probably the biggest and best bond trader of all time. he forgot to tell you about the valuable franchise of a large market maker and its associated information flow.

pricing models are very helpful in modeling the behavior of an option or portfolio of options under many different scenarios. They help one decompose the risk of an options position and good points for entering and exiting a trade.