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by Marsden
December 6th, 2001, 10:04 pm
Forum: Technical Forum
Topic: Paradox with perpetual barrier option
Replies: 152
Views: 196657

Paradox with perpetual barrier option

<t>Even if "in the Black-Scholes-Merton world, control of the company has no value", we are not talking about control, we are talking about the acquisition of assets. If the company has assets, which we must assume given S>zero, then the acquisition of stock is equivalent to the acquisition of a pro...
by Marsden
December 6th, 2001, 3:05 pm
Forum: Student Forum
Topic: Are expectations observable?
Replies: 7
Views: 189184

Are expectations observable?

<t>Would "observable expectations" mean that EOA's three investors are basing their expectations on different sets of information, and that they should agree on expectations (...but not necessarily on allocations, which are affected also by utility functions -- equilibrium can exist without everyone...
by Marsden
December 6th, 2001, 2:47 pm
Forum: Technical Forum
Topic: Risk Neutral Valuation
Replies: 36
Views: 191821

Risk Neutral Valuation

Yes, the real world story is that we only rarely have very much certainty about the information upon which we construct probability distributions. Give the coin a bias, and the story changes completely.
by Marsden
December 6th, 2001, 2:34 pm
Forum: Technical Forum
Topic: Paradox with perpetual barrier option
Replies: 152
Views: 196657

Paradox with perpetual barrier option

<t>Rock --Without having thought my way through to anything I'm confident of, here are some thoughts:1. The S-C position (which cost zero) only returns positive value if the call is exercised; otherwise S is always offset exactly by C.2. If there are no dividends on S (and if there are, we need to r...
by Marsden
December 4th, 2001, 5:02 pm
Forum: Technical Forum
Topic: Risk Neutral Valuation
Replies: 36
Views: 191821

Risk Neutral Valuation

<t>Wait a minute, Marsden. I actually know some people who are so afraid of a fiery death, that they've never flown on an airplane. Are you telling me that I should use the 33 sigma math to convince them that they should become airline pilots and fly every day? The premise of Samuelson's wager was t...
by Marsden
November 30th, 2001, 3:49 pm
Forum: Technical Forum
Topic: drift literature???
Replies: 3
Views: 189829

drift literature???

<t>Japan --I'm not clear on what exactly you are looking for, but if a stock's price has a lognormal future distribution with the log of the price having drift coefficient mu and stochastic coefficient sigma, then in a risk-neutral environment mu should be r-0.5*sigma^2, where r is the riskless rate...
by Marsden
November 26th, 2001, 8:18 pm
Forum: Technical Forum
Topic: Risk Neutral Valuation
Replies: 36
Views: 191821

Risk Neutral Valuation

<t>I don't think Samuelson's colleague would play n times if he wouldn't play once. With increasing n, the possibility of losing at all slowly approaches zero. However the low probability of the utility disaster u(-n) losing n times is so bad that it still overwhelms the larger probabilities of posi...
by Marsden
November 17th, 2001, 9:16 pm
Forum: Technical Forum
Topic: Risk Neutral Valuation
Replies: 36
Views: 191821

Risk Neutral Valuation

<t>I think that (barring currency effects, about which more later) utility cannot explain risk premium, ever. So I would not expect that a utility function could be constructed that was inconsistent with Black-Scholes.Suppose that f(x) is the probability of an outcome x, U(x) is future utility under...
by Marsden
November 17th, 2001, 1:10 pm
Forum: Technical Forum
Topic: Risk Neutral Valuation
Replies: 36
Views: 191821

Risk Neutral Valuation

<t>"If the mat is not straight, he does not sit." -- Kung Fu-Tze "If the glove doesn't fit, you must acquit." -- Johnnie Cochrane"No glove, no love." -- Traci Ullman (?) (on safe sex)---------------------<<But you could equally well interpret it as a pricing for a risk-averse investor with a differe...
by Marsden
November 15th, 2001, 6:26 pm
Forum: Technical Forum
Topic: Risk Neutral Valuation
Replies: 36
Views: 191821

Risk Neutral Valuation

<r>Hi all,Does anyone know option pricing models that don’t assume risk neutrality? Thanks >>DAS --I've convinced myself (and only myself) that risk preference should be reflected by using a risk-adjusted volatility, usually one that is less than perceived volatility. This is what I've written on th...
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