For the sake of this example, yes, I was assuming that volatility is constant and we know the correct value of the volatility. I wouldn't trade this way in the real world; that's not a realistic assumption. This is just an educational example to make the effect of hedging crystal clear.

<t>Hummuslover, with your EE background, my guess is that the biggest gap in your financial education is in the statistics / probability side. But the particular course you suggest sounds like it *might* be a fluff course rather than a rigorous one. I would suggest visiting several stats & proba...

<t>I'm trying to explain the P&L difference between buying an underpriced option naked vs. buying the option and hedging dynamically with the underlying. I'm trying to make the points that:1) The expected value of the profit is the same2) The variance of the profit is high for the underpriced op...

<r>fearless, I agree with your rough classification. I had never thought of it that way and find it quite insightful. Thanks for sharing it with us.I have been looking for software that breaks out of the Excel vs. C++ dichotomy, though. At the company I work now, a group of quants who used primarily...

<t>What options are there for using QuantLib in a .Net environment?We downloaded the .Net port from stochastix, but it's hopelessly out of date. It does not include the swaption stuff we need.We looked at converting the code to managed C++, which can be easily imported into .Net, but there are so ma...

<t>QuantLib is a free, open-source C++ software library (also ported to other languages) for quantitative programming.QuantStudio is a C# software library for quantitative programming that you have to pay for. However, our company has already paid for it, including for the source code. We have one p...

<r>Thanks for trying to answer my question.By "parity" I meant the option's intrinsic value. Here's a glossary that defines parity in the way I mean:<URL url="http://www.mrstock.com/resourceCenter/optionTermsP-Z.mspParityA"><LINK_TEXT text="http://www.mrstock.com/resourceCenter/o ... mspParityA">htt...

<t>Let's say you build a tree model that has different distributions at different points in time. For example, the first few nodes include the present value of a dividend, and the later nodes do not. Or the first few nodes have one volatility and the later nodes have a different vol. We've noticed t...

<t>Let's say you build a tree model that has different distributions at different points in time. For example, the first few nodes include the present value of a dividend, and the later nodes do not. Or the first few nodes have one volatility and the later nodes have a different vol. We've noticed t...

<t>Zed,That sounds like overkill to me. Someone is trying to model and forecast y, and you suggest starting by modeling the var(y) (or y^2). Okay, then how do they get back to modeling y after the GARCH is done? I'm not sure, but here's a guess: run through the time series, forecast var(y) for each ...