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by complyorexplain
March 10th, 2016, 1:29 pm
Forum: General Forum
Topic: Units of d1
Replies: 25
Views: 2654

Units of d1

<t>QuoteOriginally posted by: daveangelsigma * sqrt(T) is dimensionlessAgree, but every number must mean something. It's a number of what? Example, U/K is dimensionless. Right. But it means the ratio of the underlying to the strike. Similarly log(U/K) is 'moneyness'. All the terms in BS have a meani...
by complyorexplain
March 10th, 2016, 12:45 pm
Forum: General Forum
Topic: Units of d1
Replies: 25
Views: 2654

Units of d1

<t>It's a deeper question about what the second term of d1 actually means. I understand the percentage in or out of the money. I also understand the effect of the second term. When you are very close to the money, the second term dominates and gives you the time value. By contrast, when you are in o...
by complyorexplain
March 10th, 2016, 12:30 pm
Forum: General Forum
Topic: Units of d1
Replies: 25
Views: 2654

Units of d1

<t>I was being sloppy. Of course standard deviation can have no units, since the top is a quantity with a certain unit, and the bottom is the volatility, which has the same units, so the unit disappears. I mean it's the same kind of quantity. A probability is a number between 0 and 1. A standard dev...
by complyorexplain
March 10th, 2016, 12:20 pm
Forum: General Forum
Topic: Units of d1
Replies: 25
Views: 2654

Units of d1

<t>QuoteOriginally posted by: acastaldoSomething which is an argument to N() must be some kind of probability, which is unitlessI agree that the value of N() is a probability. But the units of the argument is standard deviation. log(pU/pK)/V = percent in the money divided by V = standard deviations ...
by complyorexplain
March 10th, 2016, 11:28 am
Forum: General Forum
Topic: Units of d1
Replies: 25
Views: 2654

Units of d1

<t>Simplified BS:pU N(d1) - pK N(d2) d1 = log(pU/pK)/V + V/2d2 = d1 - VpU = present value of underlying, pK = present value of strike, V = volatility per time to maturity.Informally, the first term in the main is the value of receiving the underlying at maturity given exercise, the second is the cos...
by complyorexplain
March 5th, 2016, 4:18 pm
Forum: General Forum
Topic: My theory of the market
Replies: 9
Views: 1978

My theory of the market

<t>QuoteOriginally posted by: twQuoteOriginally posted by: complyorexplain....I assume a significant number of people on this forum have some kind of job in the market. Why the hell do you do it? What belief or philosophy of life compels you to do this, rather than, say, working at Silicon Roundabou...
by complyorexplain
March 3rd, 2016, 11:29 am
Forum: General Forum
Topic: My theory of the market
Replies: 9
Views: 1978

My theory of the market

<t>Brief history of me. I came across the Efficient Market hypothesis while studying for a masters in computing in the early 1980s and found it a thing of beauty. Perversely I started work as a professional trader in the 1980s and did this for many years. My view then, and still is, that the market ...
by complyorexplain
February 28th, 2016, 12:43 pm
Forum: General Forum
Topic: Pronunciation of 'Black Scholes'
Replies: 39
Views: 3966

Pronunciation of 'Black Scholes'

<t>I go away for a few days and look what happens. Meanwhile, someone posted this nugget below, which I hadn't seen before, and was generally well worth it. Nothing new, but you see the guys who invented it all, and the narrative is presented in a gripping way that makes it seem more interesting tha...
by complyorexplain
February 26th, 2016, 11:10 am
Forum: General Forum
Topic: Pronunciation of 'Black Scholes'
Replies: 39
Views: 3966

Pronunciation of 'Black Scholes'

Apologies if this should be in the 'off topic' forum - I'm sure a moderator will happily move it.What is the correct pronunciation of 'Black Scholes'? I have always pronounced it as in 'a shoal of fish'. Some people pronounce it like 'skoles', with a hard 'ch'.
by complyorexplain
February 22nd, 2016, 11:23 am
Forum: General Forum
Topic: Jensen's inequality and Black-Scholes
Replies: 12
Views: 2379

Jensen's inequality and Black-Scholes

<t>There has been some interesting work by Peter Feldhuetter of London Business School on the effect of the inequality on the Merton model. It is a while since I looked at the paper, but from memory, the Merton spread puzzle is that the level of spreads from the model are lower than observable sprea...
by complyorexplain
February 6th, 2016, 9:12 am
Forum: General Forum
Topic: The no-no arbitrage argument
Replies: 39
Views: 5428

The no-no arbitrage argument

<t>QuoteOriginally posted by: daveangeldo you mean higher than the spot ? well not really if you can replicate the forward with a spot and borrowing. then the forward = spot + carry cost/On the other hand, the current price of the underlying should reflect all information including the likelihood of...
by complyorexplain
February 5th, 2016, 1:33 pm
Forum: General Forum
Topic: The no-no arbitrage argument
Replies: 39
Views: 5428

The no-no arbitrage argument

<t>I just came across the clearest possible expression of the no-no arbitrage argument, as follows:QuoteWhen fractional short-selling is possible, forward prices will be determined using the 'cost of carry' approach, i.e. project forward by the risk free rate, and discount to allow for any income lo...
by complyorexplain
January 30th, 2016, 12:25 pm
Forum: General Forum
Topic: Law of conservation of risk?
Replies: 43
Views: 3307

Law of conservation of risk?

<t>Someone told me last week, re a proposed hedging strategy, that it wasn't hedging properly so-called, because it was 'merely transferring risk'. This set me thinking. What else would hedging be but 'transferring risk'. Isn't it always the case that we can only reduce risk to ourselves by transfer...
by complyorexplain
January 30th, 2016, 10:54 am
Forum: General Forum
Topic: Monty Hall again
Replies: 22
Views: 3017

Monty Hall again

<t>QuoteOriginally posted by: outrunThe optimal strategy is deduced from the game rules and turns out to be independent of the game state.That seems right to me, but let's look at the reasoning of Andrew Vazsonyi here. He assumes that the prize is behind door #1, and that I guess one of the three do...
by complyorexplain
January 29th, 2016, 1:45 pm
Forum: General Forum
Topic: Monty Hall again
Replies: 22
Views: 3017

Monty Hall again

<t>Well, let (i,j) denote the outcome that the car is behind door i and the other person opens door j. So assuming she deliberately chooses a door without the prize, the only possibilities are (1,2), (1,3), (2,3), (3,2)with probabilities 1/6, 1/6, 1/3, 1/3 respectively, assuming she picks 2 or 3 wit...
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