Put-Call Parity

Me trying to study and remember this for CFA. Tried to make it as reader friendly as possible.

Puts and calls are what you examples of derivatives.  Derivatives are financial instruments and are called such because they derive value on an underlying asset (similar to maybe Christians whose value comes from God or the fact that Jesus saved them or that God created them).

Short intro, a put is an option to sell, meaning, if I have a stock I bought at Php100, and the Exercise Price of the put is Php 90, and when the price goes below Php 90, I can demand the seller of the put to buy back the shares at Php 90, limiting my losses to Php 10.

A call is an option to buy, meaning, the current price is Php 100, I don’t have money now, and the prices seem to go up, but I’ll fix my losses now, and buy a call with an exercise price of Php 105, so no matter how high the prices will go, I can buy at Php 105.

Put-call parity is this equation: c + X = p + S, with

c – price of call

X – bond purchased amounting to exercise price

p – price of put

S – price of underlying asset.

Meaning, the payoff of buying a call and a bond amounting to the exercise price is equal to the payoff of buying a put and the underlying asset.  Why is this important? Because you can create synthetic financial instruments with it!  You can create a synthetic call by transforming the equation:

c = p + S – X, meaning you buy a put and the underlying asset and you sell a bond (meaning you borrow money which you will use to buy the underlying asset).  So having a put, an underlying asset, and a loan is all equal to owning a call.  You can also create a synthetic put, bond or asset!

So why bother buying/selling 3 instruments when you can just buy a call?  This exercise is not telling you to actually buy and sell these 3 instruments.  What this is saying is the put-call parity should exist or else, there is an arbitrage opportunity.  Arbitrage basically means getting more returns with zero risk (and we all know more returns should be accompanied with more risk).  So in short, if c + X <> p + S, somebody screwed up the pricing and there is money to be made somewhere.

Proof that the put-call parity exists:

Assume that current price of share is 100, X is 150.

Transaction	Current Value	Meaning	Payoff Formula	Value at Expiration
Buy Call	c	Price you paid for the option	max(0, S-X)	0 (worthless, you’d rather buy the stock at current prices than at exercise price)
Buy Bond	X/(1+r)^T	The money you will use to buy at X, you invest it first in the Tbills	X	150 Maturity Value
			Total	150
Buy Put	p	Price you paid for the option	max(0, X-S)	50 (Stock price is 100 but you can sell at 150)
Buy Underlying Asset	S (150)	Price you paid for the asset	S (100)	100 (Current price)
			Total	150

So theeerrree… that’s the put-call parity.

For My Mushy Side

http://releasingstill.wordpress.com

I will be a banker soon

I used to rely on banker friends.  In fact, I get information not known to the public through my banker friends.  I love my banker friends.

But soon, I’ll be a banker myself.  And no longer do I need to rely on my banker friends for information, because soon, I will know them myself.

I am excited.

Inconsistency of My Blog

I realized, my blog is such a clutter of thoughts, from faith to business to nonsense thoughts and all the randomness in life.  So I guess from now on, I’m making this my business blog, then create another blog for my nonsense thoughts.   So, expect this blog to be updated in the next n months. Hahaha…

Multi Level Marketing

- taken from a direct selling brochure:

Only a half dozen MLM companies have topped the $500 million mark, and a dozen has topped the $100 million.  But literally hundreds, if not thousands of MLM companies start each year, and fewer than 2% survive more than 5 years.  When you are looking at network marketing as a means to build assets, you look at the long term.

 Harvard educated Charles King, Ph.D., marketing professor at the University of Illinois in Chicago, has made an intense study into the network marketing industry.  His suggestions for selecting a viable company are the following:

1. A company should have an established track record, a high-tech distribution network and rock-solid financial stability; and this should be transparent and audited by credible entities.
2. They should have a highly-developed support system with training systems and materials to develop leadership in the distributor foce.
3. They should have a product that is credible, good and consumable.
4. They should offer the prospect of growth through expansion, innovation or diversification to create an ever-expanding market and infinite growth.

What a beautiful Christian I am

I am not angry at God, contrary to what people think.  If any, He has taught me that He should be my bestfriend, because people will fail you.

 I do want to go to Church, but I don’t want to be with happy people.  And I’m sure they won’t understand or don’t want a moping Christian about because we’re supposed to be happily praising God.  I even hate Past Nellie, who jumps and dances around silly, because she would not understand my state now.

So instead of going to Church, I have my QT’s every Sunday.  And instead of having my QT’s everyday, I contemplate on suicide. 

 But you know me, all I do is talk about suicide.  I can’t do it yet.  So sorry to disappoint you guys who are awaiting my death.  You aren’t my beneficiaries anyway, what do you care?  (Oh wait, I get it.  You hate me that much.)

More Joan of Arcadia

Cute Boy: Remember me?
Joan Girardi: Why all the familiar looks? Doing the greatest hits, or are you getting a little pleased with yourself?
Cute Boy: You see me the way you want to see me Joan. Like right now you’re mad at me… maybe you feel safer being mad at me when I look like this.
Joan Girardi: You have alot to answer for buddy! No one asks to be born!
Cute Boy: …
Joan Girardi: So we all get to die, and then everyone we love dies?
Cute Boy: Yeah.
Joan Girardi: And… and that’s good for you?
Cute Boy: Joan, there’s nothing about death that I can say that would make sense to you.
Joan Girardi: Alot of what happens here really sucks, so much for your… perfect system
Cute Boy: …
Joan Girardi: Can you see me being really mad at you right now?
Cute Boy: Yes.
Joan Girardi: Why does it have to be so hard?
Cute Boy: What specifically?
Joan Girardi: Being alive, let’s start there.
Cute Boy: You wish you weren’t alive?
Joan Girardi: No! I… I don’t know. I wish… it didn’t… hurt so much.
Cute Boy: It hurts because you feel it Joan… because you’re alive. You love people, that generates alot of power, alot of energy. The same kind of energy that binds atoms together, we’ve all seen what happens when you try to pry them apart.
Joan Girardi: So, if I don’t get attached to people then… it won’t hurt so much?
Cute Boy: No it’s in your nature to get attached to people, I put that in the recipe. It’s when you guys try to ignore that… when you try to go it alone, that’s when it gets ugly. It’s Hell.

-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o-o

Goth God: I wouldn’t worry about self defense.
Joan: Then why the psycho mission because I didn’t sign up for martyrdom.
God: Heh! Joan. Have I ever endangered you?
Joan:Well, you never told me to ask evil out on a date before.
God: Evil is not a word to use lightly. It’s only the darkest end of a broad spectrum.
Joan: You mean like light?
God: Exactly like light. Nobody is born in total darkness. Most of you live on the grey end of the spectrum, a lie here and there, jealousy, wrath. But you only get to absolute evil by doing one thing after another till eventually you’re transformed.
Joan: Like…into a monster.
God: A monster is a creature with no consciousness. They’re extremely rare, but they do exist.
Joan: Have you watched the news? I’m not sure they’re so rare.
God: Almost everybody has some light somewhere. And light is always worth fighting for.
Joan:  Ok. So I’m supposed to find Ramsey’s…light.
God: I just want you to listen and observe. Be present.

Soooo… can somebody fight for the little candle light in me? 

My Officemate Said

“I am so sad. I can’t pull myself out of my sadness.”

 I know how you feel.  And I’m sorry I can’t comfort you.  Cos I don’t know how to pull myself out of it either.

Neurofinance (or “At Last, A Post Related to Stocks & Business)

The following are excerpts from the NY Times article “Craving the High That Risky Trading Can Bring”

Neurofinance: an emerging field that combines psychology, neuroscience and economics, to examine how the brain makes decisions.

A small group of scientists, including some psychologists, say they are starting to discover what many Wall Street professionals have long suspected — that people are hard-wired for money. The human brain, these researchers say, responds to high-stakes trading just as it does to the lure of sex. And the riskier the trades get, the more the brain craves them.

Brian Knutson, a professor of psychology and neuroscience at the Stanford University, has sent volunteers through high-power imaging machines to map their brains as they trade. He concludes that sometimes, people get high on making money.

Neuroeconomics has not won many converts on Wall Street, however, the field seems to be gaining some traction. The editor of the Intelligent Investor, Jason Zweig, discovered that brain images of drug addicts who are about to take another hit are indistinguishable from those of traders who are making money and about to place another trade.

Daniel Kahneman, a Nobel Prize-winning psychologist, showed that individuals do not always act rationally when faced with uncertainty in decision making. When faced with losses, individuals may seek to take more risk rather than less, contrary to what traditional economic thought might suggest.

“When you are threatened with extinction, you act like nothing matters,” said Andrew Lo, a professor at M.I.T. who has studied the role of emotions in trading.

Mr. Lo and Dmitry V. Repin of Boston University have studied traders to determine how stress and emotions affect investment returns. They monitored traders’ vital signs like heart rate, body temperature and respiration as their subjects darted in and out of trades.

The findings, while preliminary, suggest — perhaps unsurprisingly — that traders who let their emotions get the best of them tend to fare poorly in the markets. But traders who rely on logic alone don’t do that well either. The most successful ones use their emotions to their advantage without letting the feelings overwhelm them.

People like to think that logic prevails in the financial markets, that traders and investors always act rationally. But Wall Street can get carried away. The Internet boom and bust were followed by an even bigger boom and bust in mortgage lending. Wall Street is now saddled with more than $100 billion in losses stemming from mortgage investments, and the economy may be sliding into recession.

Career eck eck

Is this advice the answer to my unsaid prayer?   Haha, my discipler will kill me.

Q. I graduated from the best undergraduate institution in America, and I’m now at a top private school in Japan working on my master’s degree in engineering. But I’m afraid engineering is not a field I want to work in. I want to live in Japan, but I don’t want to become one of those tired workers returning home on the train late at night. Thinking about growing up, getting a job, and picking my own future makes me feel like I’m losing my mind and maybe my soul too.

When I think about the jobs I want to do, I think about all the people I’ll be letting down, and I wonder if I’ll be letting myself down as well. Will I spend the rest of my life thinking “I had the potential to be something great”?

I’m also afraid that if I don’t take a top job now, while I’m at the top of my education, I won’t be able to move up into that top job later. How do you plan a future appropriate to your skills and abilities without sacrificing your values or your own compass, if your heart isn’t aimed that high?

A. It’s important not to fall into the trap of thinking that there’s only one path to success — that taking one of the perceived “top jobs” at a “top company” after graduation is the only way to achieve professional success. Indeed, some of the most successful professionals are the ones who, at an early stage in their careers, had enough confidence in their skills to stop worrying about credential building and instead focused on finding opportunities where they could make a meaningful contribution.

Consider Sumner Redstone, chairman and chief executive of Viacom. Mr. Redstone started his career as a highly credentialed lawyer. He graduated from Harvard Law School, held a prestigious clerkship, and in private practice, argued cases in front of the Supreme Court. It was not until he took a risk and took over his family’s failing business, though, that he put himself on track to become one of the most successful people in the media business.