Tuesday, April 26, 2005


Now, Wilmott is a great magazine - the forums are very edumacational and whatnot, and most of the articles are thorough, and get as technical as the reader would like.

Today, on the front page, we find this:

Finance Focus event: The Non-Greek Non-Foundation of Derivative Pricing

How can derivative pricing be founded when the derivative pricing models all rely on a fixed collection of states of the world (e.g. values of the underlying, or other state variables) and the subsequent trading of those derivatives in fact never stops expanding the collection of states of the world? For instance, Black-Scholes assumes the underlying as sole state variable, yet trading options with Black-Scholes will almost certainly create new states of the world, i.e. stochastic implied volatility. Like all the sciences falling under the umbrella of the metaphysics of presence, option pricing theory cannot avoid this schema. There can be no foundation without presence. Yet the bigger picture of derivative pricing-AND-trading (in other words, the full story of calibration AND recalibration) is here to teach us that there is a non-foundation below the foundation, what we would call, following Derrida, the "non-Greek" non-foundation. Once we start looking at the derivatives from a non-foundational, i.e. deconstructed, point of view, it might appear to us that they are less derivative and more primordial to our overall understanding of the market than we think.

This made me think of both Zev and Yehuda.
Chag Sameach everybody.


Yehuda said...

It is good that at least someone associates me with "non-Greek" (or was it Derrida that made you think of me?).

Zev said...

I am guessing the Derrida was me.

Oren Bassik said...

Yehuda, you would be proud of me, I spend all day talking about the greeks. I talk about greeks probably more than you ever did.

(People refer to option risk numbers as "greeks" - they are all represented by greek letters, e.g. delta, gamma, theta, and rho, as well as a few things that pretend to be greek letters like vega, vomma, and, well, (cough) skew.)

People actually yell things like "What are the greeks" and "I don't know the %$*@! greeks!" and such. I am routinely entraced by long, deep lectures on "greek wisdom", as it were.

Yehuda said...

Well, Oren, I must say: it's all Greek to me. ;)