I wonder whether on page 356, the second expression for epsilon shouldn't be divided by sqrt(2)

You are right! (and now I just remeber P.W. pointed this out to me as well)Thanks to both of youI just added it to my erreta list that can be found herehttp://www.espenhaug.com/books.html Typos will likely be fixed in re-prints. I figured out this had happened in my first edtion without me being aware of it, publisher had looked up my erreta page

on several instances, say page 460 eq. 12.19, if the indexes i,j in the double summation are like they are used, ie. i=1..n,j=1..n,i not equal j, then number 2 shouldn't be in front of double summation. Either removing 2 or changing the indexes to i=1..n,j=2..n,i<j would make the formulas correct.

An absolutely fantastic book, and a great author!Collector: Any plans for a third edition?

Third edition probably, but earliest 3 years from now.just now writing a new book, it is not about options, but it discusses a topic that have implications for options,economic, statistics, mathematics, physics, biology, cosmology, alchemy, philosophy, love, religion, ....hope to have it out within 2 years.

QuoteOriginally posted by: CollectorThird edition probably, but earliest 3 years from now.looking forward to it !Quotejust now writing a new book, it is not about options, but it discusses a topic that have implications for options,economic, statistics, mathematics, physics, biology, cosmology, alchemy, philosophy, love, religion, ....hope to have it out within 2 years.I trust that you'll finally debunk global warming ?

Is the Net Weighted Vega Exposure on page 82 = to modified Vega. Sorry about the question, but i do not understand the concept of modified Vega and particularly the relation to the so called Volatility Strategies of Second Order. Would You mind describing this strategy briefly ?

QuoteOriginally posted by: StockBossAn absolutely fantastic book, and a great author!Collector: Any plans for a third edition?A second edition is been published few time ago and you are asking for a third edition???Books are expensive and I really don't like books with many editions after just few months (like Hull for example!).A new edition must come up ONLY if it is really necessary because it changes drammatically the contents of the previous one (see the book in question and "Volatility and Correlation" by Rebonato for examples).Most of the new editions just add a new chapter to the book. It would be better to upload this chapter on the author's homepage!Pier

"Is the Net Weighted Vega Exposure on page 82 = to modified Vega. "yes that is the idea to modify vega (but not sure what your definition is), I wrote about this in 1992 and published in 1993. (free download bottom of my article page ( http://www.espenhaug.com/articles.html ), however much more interesting would be to run same study on implied vols, (no discrete sampling error and also much more relevant in relation to vega and the option formula approach great option traders actually use)I would have written this paper in different way today, but yes idea is basically vols with different maturity moves not parallel, short term vols more volatile than long term. When looking at historical you have problem with sampling error (if not access to very good clean intraday database). Also implied vol much more relevant for vega. Remember implied vol not simply is future expected standard deviation but also related to supply demand of options (the vol smile, etc etc.).Short term implied vol much more volatile than long term for several reasons. (me and some friends have done sizable study on implied vols, will see if we get time to clean up the paper and publish it)A. Implied vol is often partly related to expected realized vol: and shocks in underlying asset are typically short term. If market crash 30% in a day, it it extremely unlikely it will crash (or also jump up) with around 30% every day for very long period of time...B. Short dated options are much cheaper in terms of money, but risk is just as big as for long dated options if not larger (higher gamma etc). All players have limited capital. Lets say you have 10 million to invest in option premium. If you lift market maker for 10m in premium for 1 year options atm, yes he get short options but risk is much lower than if you lift him for 10m in premium 1 weeks. if u lift him for 10m in premium 1 week, he likely need to quickly run in market cover big part of position. This is also related to A. Because of A risk is higher in short dated. AND because delta hedging fails to remove most risk, yes any sensible market maker that is lifted for lots of premium (and thereby huge notional) in short dated will run around in market to cover big part with other options (with similar maturity and strike). Naturally also risky in long dated (in few cases larger risk here) but I am talking relative to invested capital etc. could write a book about this....but don't have time, there are more important things in life than options; women, the meaning of life, global cooling, spiking food prices and hedging your wealth for FIAT ballooning inflation....

Next edition in C#?

Next edition will likely have C code in one way or other....but earliest 3 years - 2 days ahead. good thing I finished up a 10 year project (that I almost had given up to solve) now that took big part of my time, so more time to write books now...

QuoteOriginally posted by: CollectorNext edition will likely have C code in one way or other....but earliest 3 years - 2 days ahead. good thing I finished up a 10 year project (that I almost had given up to solve) now that took big part of my time, so more time to write books now...are you semi-retired after making enough $? Have you thought to be a risk advisor by running a firm?

Quoteare you semi-retired after making enough $? Have you thought to be a risk advisor by running a firm?Yes these days you need to make a lot of $ (USD), I just made moderate $ (or small $ it is relativistic). By luck I sold most of my $ years ago when $ still had good value. I do not believe in retirement, not even after death I plan to retire, just change profession....for example as nutritious soil for a nice tree, my first degree is tree-farming and garden plants, options are just one of my many hobbies.

QuoteOriginally posted by: CollectorQuoteare you semi-retired after making enough $? Have you thought to be a risk advisor by running a firm?Yes these days you need to make a lot of $ (USD), I just made moderate $ (or small $ it is relativistic). By luck I sold most of my $ years ago when $ still had good value. I do not believe in retirement, not even after death I plan to retire, just change profession....for example as nutritious soil for a nice tree, my first degree is tree-farming and garden plants, options are just one of my many hobbies.The fact that you are so motivated makes you succeed and become a richer single guy. Nice job done.

Thanks for writing this wonderful book!However, I have a question regarding the formula for local volatility on page 459. The formula also appears in Paul's book.I have seen another version of the formula at Performance Trading where the implied volatility in the denominator is squared. I've seen another thesis that quotes the 'volatility squared' version of this formulaI'm sure all of us would be grateful if you or Paul could confirm the correct formula