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spacemonkey
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Joined: August 14th, 2002, 3:17 am

are constants tradable

January 15th, 2013, 7:57 am

QuoteOriginally posted by: AlanGood, bearish, that was helpful to me. Of course, I raised the issue of "real-world" cash as a kind of a follow-up question, so let me see if I can paraphrase spacemonkey's resolution of the original question:"are constants tradeable?"In a world with dividends, a tradeable should be thought of as the price process or the total returnprocess of anything that can be traded, as long as it remains positive. Since the money market account,in a world with non-zero interest rate r(t) can always be thought of as having a price process of 1 and paying dividends at the rate r(t), then "1" is certainly a tradeable. Then a separate issue is the role of actual cash (see bearish's remarks).Yeah, that's pretty much exactly what I meant. It's just terminology, but terminology is important.Although physical cash (banknotes and coins) is a different question, as it happens I'm not sure there is an issue there either. Fungibility means the recipient of paper money can choose to earn the dividend if they want, by putting it into a bank account. From a modelling point of view, we might as well assume they'll always funge, in the same way we assume they'll always exercise a call option in the money.