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BramJ
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Joined: January 10th, 2006, 2:01 pm

Given that calibration is nonsense, what is the solution to making markets on Exotics

May 9th, 2011, 7:09 pm

QuoteOriginally posted by: frenchXI agree with Tinman that we could talk for weeks what we need is a quantitative comparison. I also distinguish a model for pricing to a model for hedging. Just to threadjack slightly: I might misunderstand, so what do you mean by that? Having different stochastic models for the behaviour of the underlying for pricing and hedging? Suppose your pricing model gives a value P (or a range (P1,P2) for my question I am not looking to get into discussions about points versus ranges of values) and your hedging model gives a price of H. I'd say you either have P close to H and then your hedging model is a good pricing model or you have P and H very differently. In the latter case, how are you going to get the distribution of the replicated payoff centered around P instead of H?Edit: obviously P and H could be close initially but could expect one of them to be more misspecified as the other and hence one of the values be more stable as the other. But then why not price and hedge on the more stable/robust model?
Last edited by BramJ on May 8th, 2011, 10:00 pm, edited 1 time in total.
 
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Paul
Posts: 10787
Joined: July 20th, 2001, 3:28 pm

Given that calibration is nonsense, what is the solution to making markets on Exotics

May 9th, 2011, 8:26 pm

QuoteOriginally posted by: Alan I have it, but I need a copy of "A note on hedging: restricted but optimal delta hedging ..."as you referred me to that.I think you have to be a subscriber to the magazine to get it. (I am sure that you appreciate I wear many different hats and I am very good at Chinese walls and I have various partners I don't want to upset.) Anyway the book has the main concepts, and that's what I want to explain.If TinMan, et al have copies then I'll give a chapter-by-chapter reading list. P
Last edited by Paul on May 8th, 2011, 10:00 pm, edited 1 time in total.
 
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crmorcom
Posts: 452
Joined: April 9th, 2008, 4:09 pm

Given that calibration is nonsense, what is the solution to making markets on Exotics

May 9th, 2011, 8:43 pm

QuoteOriginally posted by: PaulQuoteOriginally posted by: Alan I have it, but I need a copy of "A note on hedging: restricted but optimal delta hedging ..."as you referred me to that.I think you have to be a subscriber to the magazine to get it. (I am sure that you appreciate I wear many different hats and I am very good at Chinese walls and I have various partners I don't want to upset.) Anyway the book has the main concepts, and that's what I want to explain.If TinMan, et al have copies then I'll give a chapter-by-chapter reading list. PI do not have a copy, I'm afraid.
 
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Paul
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Joined: July 20th, 2001, 3:28 pm

Given that calibration is nonsense, what is the solution to making markets on Exotics

May 9th, 2011, 8:50 pm

That's a shame. It would then be so easy to point out possibilities of modelling. That's really what I'm trying to achieve here, not to replace calibration with anything specific but to show things you've probably never seen before that are quite mind expanding! P
 
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crmorcom
Posts: 452
Joined: April 9th, 2008, 4:09 pm

Given that calibration is nonsense, what is the solution to making markets on Exotics

May 9th, 2011, 8:56 pm

QuoteOriginally posted by: PaulThat's a shame. It would then be so easy to point out possibilities of modelling. That's really what I'm trying to achieve here, not to replace calibration with anything specific but to show things you've probably never seen before that are quite mind expanding! PIf I were persuaded that there were enough things in it that I haven't seen before then I would probably buy it
 
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Paul
Posts: 10787
Joined: July 20th, 2001, 3:28 pm

Given that calibration is nonsense, what is the solution to making markets on Exotics

May 9th, 2011, 9:04 pm

I knew this website thing would pay off eventually!What's your math background?P
 
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crmorcom
Posts: 452
Joined: April 9th, 2008, 4:09 pm

Given that calibration is nonsense, what is the solution to making markets on Exotics

May 9th, 2011, 9:06 pm

QuoteOriginally posted by: PaulI knew this website thing would pay off eventually!What's your math background?PPart III, and I have an economics PhD.
 
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Paul
Posts: 10787
Joined: July 20th, 2001, 3:28 pm

Given that calibration is nonsense, what is the solution to making markets on Exotics

May 9th, 2011, 9:12 pm

Are you ready to have your mind expanded?! I can pretty much guarantee you will see good sftuff you've not seen elsewhere. Ask frenchX for his opinion, he knows the literature!I'm feeling all emotional...Children, Daddy has just sold his book, you will eat tomorrow, you will!P
 
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crmorcom
Posts: 452
Joined: April 9th, 2008, 4:09 pm

Given that calibration is nonsense, what is the solution to making markets on Exotics

May 9th, 2011, 9:21 pm

And, by golly, you would eat (and drink) very well! Do you not sell volume II separately?I will see if someone in the building has a copy. In the meantime, don't let that stop you from giving references.
 
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TinMan
Posts: 613
Joined: September 21st, 2006, 9:42 am

Given that calibration is nonsense, what is the solution to making markets on Exotics

May 9th, 2011, 9:27 pm

I have a copy of the books, so if you have chapters in mind I'll certainly read them.I don't have the journal for 2009 but the abstract looks interesting, could you give a quick outline of what's involved?
 
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Paul
Posts: 10787
Joined: July 20th, 2001, 3:28 pm

Given that calibration is nonsense, what is the solution to making markets on Exotics

May 10th, 2011, 7:44 am

QuoteOriginally posted by: crmorcom Do you not sell volume II separately?No, because each volume builds on the previous.I will put together a few notes and a reading list shortly.P
 
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Paul
Posts: 10787
Joined: July 20th, 2001, 3:28 pm

Given that calibration is nonsense, what is the solution to making markets on Exotics

May 10th, 2011, 10:19 am

Reading list to follow, first the plan as I see it. 1. Frame of mind: Open! Not cynical. We are going to be doing lots of concepts, none of which will frighten the horses. We will be leaving risk neutrality far, far behind. Are you ready for that shock to the system?!2. The concepts and math tools will all be classical. It's putting them together that is novel. So no "string theory of finance" will be involved! Basic probabilistic concepts, stochastic calculus, and some utility theory at times. We will be doing applied maths. This means cutting to the chase whenever possible. Life is too short to prove the obvious. 3. We will be discussing finance, maths, economics, the price of baked beans, also what do traders want, what do risk management want, buy side versus sell side. We aim to reflect the business of finance as much as possible.4. We are aiming for "better" not "perfection."5. Don't worry about practicality, yet. Once we've got some ideas, maths and models we like then we can try to make them easier to implement. This might be the tough bit. You might love all the ideas and then get frustrated at how to implement them. This may be where we do some "original research."Or maybe it will all go horribly wrong.P
 
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Vegawizard
Posts: 157
Joined: November 27th, 2006, 10:46 am

Given that calibration is nonsense, what is the solution to making markets on Exotics

May 10th, 2011, 10:32 am

Can't wait !Am in my front row seat and eagerly awaiting the ride to begin
 
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Paul
Posts: 10787
Joined: July 20th, 2001, 3:28 pm

Given that calibration is nonsense, what is the solution to making markets on Exotics

May 10th, 2011, 10:37 am

I'll wait until the others have similarly expressed their eagerness! (Although I will take frenchX's and Alan's as read!)P
 
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Douglas01
Posts: 23
Joined: December 28th, 2008, 11:38 am

Given that calibration is nonsense, what is the solution to making markets on Exotics

May 10th, 2011, 10:56 am

This seems interesting enough to spend some time on
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