SERVING THE QUANTITATIVE FINANCE COMMUNITY

Search found 93 matches

by complyorexplain
April 21st, 2016, 3:34 pm
Forum: General Forum
Topic: Two option myths?
Replies: 36
Views: 3651

Two option myths?

<t>Ah! And Paul Wilmott himself discusses the question in Paul Wilmott Introduces Quantitative Finance, section 6.6, except Google books chopped off the next page, frustratingly. Paul, our library has 8 of your books but not this one. The list includes 'Derivatives: the theory and practice of financ...
by complyorexplain
April 21st, 2016, 3:16 pm
Forum: General Forum
Topic: Two option myths?
Replies: 36
Views: 3651

Two option myths?

<t>OK how about this from The Econometrics of Financial Markets by Campbell & Lo.QuoteConsider the argument that implied volatilities are better forecasts of future volatility because changing market conditions cause volatilities [to] vary through time stochastically, and historical volatilities...
by complyorexplain
April 21st, 2016, 11:49 am
Forum: General Forum
Topic: Two option myths?
Replies: 36
Views: 3651

Two option myths?

<t>QuoteOriginally posted by: PaulIt's all discussed in PWIQF2 and PWOQF2, and several papers in our magazine, some of which are freely available on this website, in some videos here as well, and lectured on in the CQF. If any of this is a myth it is only to those who don't know the literature. Like...
by complyorexplain
April 20th, 2016, 2:46 pm
Forum: General Forum
Topic: Two option myths?
Replies: 36
Views: 3651

Two option myths?

<t>QuoteOriginally posted by: Traden4AlphaThose who worry about violations of preconditions are worried about the unknown distribution of deviations in performance of the model especially in the context of leverage and especially in the context of systemic use of a formula.I had a different set of w...
by complyorexplain
April 20th, 2016, 12:36 pm
Forum: General Forum
Topic: Two option myths?
Replies: 36
Views: 3651

Two option myths?

<t>QuoteOriginally posted by: daveangelindeed the black scholes model is very robustThere is a certain type of person who has read some textbook and understood the 'conditions' of BS as necessary conditions rather than sufficient conditions. E.g. the conditions are deep and liquid markets, 24/7 trad...
by complyorexplain
April 20th, 2016, 11:42 am
Forum: General Forum
Topic: Two option myths?
Replies: 36
Views: 3651

Two option myths?

<t>QuoteOriginally posted by: daveangelQuoteOriginally posted by: complyorexplainQuoteOriginally posted by: daveangelwhat are the myths ?Myth 1. Volatility cannot be time varying in order for Black Scholes to be (approximately) valid.Myth 2. Returns must be log normal in order for Black Scholes to b...
by complyorexplain
April 20th, 2016, 11:06 am
Forum: General Forum
Topic: Two option myths?
Replies: 36
Views: 3651

Two option myths?

QuoteOriginally posted by: daveangelwhat are the myths ?Myth 1. Volatility cannot be time varying in order for Black Scholes to be (approximately) valid.Myth 2. Returns must be log normal in order for Black Scholes to be (approximately) valid.
by complyorexplain
April 20th, 2016, 9:41 am
Forum: General Forum
Topic: Two option myths?
Replies: 36
Views: 3651

Two option myths?

<t>#1 Volatility cannot be time varying . Why? I ran some hedging simulations with time varying volatility, including actual FTSE data for the last 30 years, where historical vol (over rolling 2 y period) varies a lot, and it doesn't seem to matter much, so long as you know the ultimate realised vol...
by complyorexplain
March 10th, 2016, 8:39 pm
Forum: General Forum
Topic: Units of d1
Replies: 25
Views: 2654

Units of d1

<t>QuoteOriginally posted by: bearishI may not have read all the posts below equally carefully, but both d1 and d2 can be interpreted as the number of standard deviations above its mean that the stock price has to be at maturity for the call to expire in the money. The reason they are different, and...
by complyorexplain
March 10th, 2016, 2:54 pm
Forum: General Forum
Topic: Units of d1
Replies: 25
Views: 2654

Units of d1

<t>QuoteOriginally posted by: daveangelQuoteOriginally posted by: complyorexplainlog(pU/pK) + V^2/2 = log(pU/pK * exp(V^2/2) ) ?indeed.... now if you think about it S*exp(0.5*v^2) is just an estimate of a the future price of the stock at time t (where v = sigma * sqrt(t))And so S/pK is the moneyness...
by complyorexplain
March 10th, 2016, 2:36 pm
Forum: General Forum
Topic: Units of d1
Replies: 25
Views: 2654

Units of d1

log(pU/pK) + V^2/2 = log(pU/pK * exp(V^2/2) ) ?
by complyorexplain
March 10th, 2016, 2:30 pm
Forum: General Forum
Topic: Units of d1
Replies: 25
Views: 2654

Units of d1

<t>This paper explains it nicely. N(d1) is the factor by which the present value of contingent receipt of the underlying, contingent on exercise, exceeds the current value of the underlying. N(d2) is the risk-adjusted probability of exercise. [edit] which is presumably why the hedge ratio is N(d1), ...
by complyorexplain
March 10th, 2016, 2:15 pm
Forum: General Forum
Topic: Units of d1
Replies: 25
Views: 2654

Units of d1

Ah even better log(pU/pK) + V^2/2 = log(pU/pK + exp(V^2/2) )Note exp(V^2/2) is the mean of a lognormal variable.
by complyorexplain
March 10th, 2016, 2:10 pm
Forum: General Forum
Topic: Units of d1
Replies: 25
Views: 2654

Units of d1

<t>I think I have it. Let?s express d1 as followsd1 = [ log(pU/pK) + V^2/2 ]/VThis is clearly a number of standard deviations. Then the numerator islog(pU/pK) + V^2/2which is clearly moneyness. Then you ask what the v-squared term is doing. Answer, the first term of the BS formula represents the val...
by complyorexplain
March 10th, 2016, 1:50 pm
Forum: General Forum
Topic: Units of d1
Replies: 25
Views: 2654

Units of d1

<t>QuoteOriginally posted by: CuchulainnIs this not some (standard?) application of dimensional analysis that's used in engineering PDE etc.?QuoteIn engineering, applied mathematics, and physics, the Buckingham π theorem is a key theorem in dimensional analysis. It is a formalization of Rayleigh's m...
GZIP: On