Behavioral Finance
Fuled by Randomness
📘 Fooled by Randomness — Nassim Nicholas Taleb🎯 Core Idea🎲 We systematically confuse luck with skill📉 Randomness explains far more success and failure than we admit🧠 We invent […]
EON Investment Insights
Understand stock price as a forecast
“I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines” - Charlie Munger
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Derivatives
The Greeks – Vega (V)
Here is a clear, accurate translation into English, keeping the financial meaning intact: Vega (V) Vega is the rate at which the value of an options portfolio changes […]
Derivatives
The Greeks – Gamma (Γ)
Also, the relationship between the option price and the underlying price is not linear. Gamma determines the degree of curvature of this relationship. It is the second derivative […]
Derivatives
The Greek Letters
📈 As we saw, Delta Hedging is a very effective tool for hedging the risk of a sold option.⚖️ When a portfolio becomes Delta Neutral, changes in the […]
Derivatives
The Greek Letters – Δ (Delta)
Trading options requires risk hedging.Suppose an investment fund uses the Black-Scholes-Merton model to calculate the value of a call option and then sells it in the market at […]
Derivatives
Black-76 Model – Futures Options
Black’s brilliant model was originally developed for pricing European futures options (“The Pricing of Commodity Contracts,” Journal of Financial Economics, 3 (March 1976)). Later, it turned out to […]
Derivatives
Valuation of American Futures Options
Valuation of American-Style Futures Options using Binomial Trees American-style futures options are valued using binomial trees. The difference between a futures option and a stock option is that […]
Derivatives
Futures Options
A futures option is the right, but not the obligation, to enter into a futures transaction at a predetermined futures price, by a predetermined date. The final date […]
Derivatives
Stock vs Bonds
📌 Why Long-Term Stock Guarantees Are More Expensive Than They Look I recently came across a fascinating “Business Snapshot” in John Hull’s classic textbook Options, Futures, and Other […]
Derivatives
Portfolio Insurance with Index Option
A diversified portfolio’s value can be insured using options written on a corresponding index (e.g., the S&P 500). If we assume that the portfolio closely replicates the index, […]
Derivatives
Employee Stock Options
Microsoft was one of the first companies to grant stock options to all employees. Later it was estimated that thanks to this decision, more than 10,000 employees became […]
Derivatives
Estimating Volatility from Data
How to Assess a Stock’s Risk Based on Historical Data We know that in finance, “risk” usually refers to volatility, i.e., uncertainty regarding changes. Here, I want to […]
Derivatives
The Distribution of Rate of Return
Suppose an investment fund (or a development company) promises you an average return of 14% per year. To convince you, they show that over the last 5 years […]
Derivatives
Lognormal Property – Example
აქციის ფასის მოძრაობის მოდელი აკეთებს დაშვებას, რომ დროის ძალიან მცირე მონაკვეთში ფასის %-ული ცვლილება ხასიათდება ნორმალური დისტრიბუციის ალბათობით. განვსაზღვროთ: μ – (Expected return on stock per year – continiously […]
Derivatives
Correlated Processes
Why diversification fails during market crises… Assume two variables, (x_1) and (x_2), follow generalized Wiener processes: dx1 = a1·dt + b1·dz1 and dx2 = a2·dt + b2·dz2 The […]
Derivatives
Lognormal Property of Stock Price
1. The starting point — stock price process We assume that the stock price SSS follows a geometric Brownian motion: dS = μS*dt +σS*dz where: find also: Geometric […]
Derivatives
Ito’s Lemma in Forwards
To describe the evolution of a derivative of stock price, we use Ito’s Lemma. For example, through it we can express the fair forward price of a stock […]