20 lines
1.5 KiB
Plaintext
20 lines
1.5 KiB
Plaintext
Chapter 28: Mathematical Applications 489
|
||
information on the underlying stock are also necessary. The larger programmable cal
|
||
culators can handle calculations such as the Black-Scholes model, computing the
|
||
hedge ratio, and determining the probability of a stock being above or below a cer
|
||
tain price at some future time. However, more involved calculations, such as com
|
||
puting the implied volatility or determining the expected return of a position, require
|
||
the use of a computer.
|
||
SUMMARY
|
||
Two basic mathematical aids have been presented: the pricing model and the ability
|
||
to predict the probability of a stock's movement. The hedge ratio and the expected
|
||
return analysis are extensions of the basic aids. Any strategy can be evaluated with
|
||
these tools. Such an analysis should be able to give the trader or strategist some idea
|
||
of the relative attractiveness of establishing the position, and may also aid in making
|
||
follow-up adjustments to the position. All the analyses rely heavily on one's estimate
|
||
of the volatility of the underlying stock Using the implied volatility seems to be one
|
||
of the best ways to obtain an accurate, current volatility estimate, since it is derived
|
||
from the prices in the market itself. The applications presented here are not all-inclu
|
||
sive. The strategist who is, or becomes, familiar with the advantages of rigorous math
|
||
ematical analysis will be able to construct many other aids for his trading that utilize
|
||
the basic mathematics described in this chapter. |