Volume 2023, Issue 125. Pages 1-96
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In this issue:
- D. Tudball, “Contents,” Wilmott, vol. 2023, iss. 125, 2023.
[Bibtex] [Abstract]Contents
@article{WILM:WILM11116, title = {{Contents}}, author = {Tudball, Daniel}, year = 2023, journal = {Wilmott}, publisher = {Wilmott Magazine, Ltd}, volume = 2023, number = 125, doi = {10.54946/wilm.11116}, issn = {1541-8286}, url = {http://dx.doi.org/10.54946/wilm.11116}, abstract = {Contents} } - D. Tudball, ,” Wilmott, vol. 2023, iss. 125, 2023.
[Bibtex]@article{WILM:WILM11117, title = {{}}, author = {Tudball, Daniel}, year = 2023, journal = {Wilmott}, publisher = {Wilmott Magazine, Ltd}, volume = 2023, number = 125, doi = {10.54946/wilm.11117}, issn = {1541-8286}, url = {http://dx.doi.org/10.54946/wilm.11117}, abstract = {} } - A. Brown, “The Hunting of the Snark,” Wilmott, vol. 2023, iss. 125, 2023.
[Bibtex] [Abstract]For people who want to understand what zk-SNARKs are, why they are important, how to use them safely, and what the future might hold; without unnecessary technical detail.
@article{WILM:WILM11118, title = {{The Hunting of the Snark}}, author = {Brown, Aaron}, year = 2023, journal = {Wilmott}, publisher = {Wilmott Magazine, Ltd}, volume = 2023, number = 125, doi = {10.54946/wilm.11118}, issn = {1541-8286}, url = {http://dx.doi.org/10.54946/wilm.11118}, abstract = {For people who want to understand what zk-SNARKs are, why they are important, how to use them safely, and what the future might hold; without unnecessary technical detail.} } - R. Poulsen, “We Hold These Truths not to be Self-evident, Part 3: Mission Impossible?,” Wilmott, vol. 2023, iss. 125, 2023.
[Bibtex] [Abstract]In Math, you can prove a negative. Let’s take a look at some mostly model based examples.
@article{WILM:WILM11119, title = {{We Hold These Truths not to be Self-evident, Part 3: Mission Impossible?}}, author = {Poulsen, Rolf}, year = 2023, journal = {Wilmott}, publisher = {Wilmott Magazine, Ltd}, volume = 2023, number = 125, doi = {10.54946/wilm.11119}, issn = {1541-8286}, url = {http://dx.doi.org/10.54946/wilm.11119}, abstract = {In Math, you can prove a negative. Let’s take a look at some mostly model based examples.} } - G. Giller, “Yes, Quants Should Care about Money Left on the Table,” Wilmott, vol. 2023, iss. 125, 2023.
[Bibtex] [Abstract]What if, in some way, we had access to some counterfactual measure of how well wecould have done with our trading?
@article{WILM:WILM11120, title = {{Yes, Quants Should Care about Money Left on the Table}}, author = {Giller, Graham}, year = 2023, journal = {Wilmott}, publisher = {Wilmott Magazine, Ltd}, volume = 2023, number = 125, doi = {10.54946/wilm.11120}, issn = {1541-8286}, url = {http://dx.doi.org/10.54946/wilm.11120}, abstract = {What if, in some way, we had access to some counterfactual measure of how well wecould have done with our trading?} } - S. Das, “Alice Through The Crypto Glass: Part 4 ,” Wilmott, vol. 2023, iss. 125, 2023.
[Bibtex] [Abstract]Bringing this series to a close, the author considers potential applications of blockchain technology.
@article{WILM:WILM11121, title = {{Alice Through The Crypto Glass: Part 4 }}, author = {Das, Satyajit}, year = 2023, journal = {Wilmott}, publisher = {Wilmott Magazine, Ltd}, volume = 2023, number = 125, doi = {10.54946/wilm.11121}, issn = {1541-8286}, url = {http://dx.doi.org/10.54946/wilm.11121}, abstract = {Bringing this series to a close, the author considers potential applications of blockchain technology.} } - P. Balan, “Designing Banking Book balance forecasting models to support multiple use cases Part II,” Wilmott, vol. 2023, iss. 125, 2023.
[Bibtex] [Abstract]In this article, we discuss the design framework for a single model for a portfolio of similar Banking Book products shared across all use cases requiring balance or associated forecasts in detail.
@article{WILM:WILM11122, title = {{Designing Banking Book balance forecasting models to support multiple use cases Part II}}, author = {Balan, Priya}, year = 2023, journal = {Wilmott}, publisher = {Wilmott Magazine, Ltd}, volume = 2023, number = 125, doi = {10.54946/wilm.11122}, issn = {1541-8286}, url = {http://dx.doi.org/10.54946/wilm.11122}, abstract = {In this article, we discuss the design framework for a single model for a portfolio of similar Banking Book products shared across all use cases requiring balance or associated forecasts in detail.} } - M. Kelly, “Financial Time Series,” Wilmott, vol. 2023, iss. 125, 2023.
[Bibtex] [Abstract]In this article, we will focus on the time series data which is the basis of all financial analysis, and which can be encapsulated with the functions TimeSeries, for single series, and TemporalData, for a collection of time series.
@article{WILM:WILM11123, title = {{Financial Time Series}}, author = {Kelly, Michael}, year = 2023, journal = {Wilmott}, publisher = {Wilmott Magazine, Ltd}, volume = 2023, number = 125, doi = {10.54946/wilm.11123}, issn = {1541-8286}, url = {http://dx.doi.org/10.54946/wilm.11123}, abstract = {In this article, we will focus on the time series data which is the basis of all financial analysis, and which can be encapsulated with the functions TimeSeries, for single series, and TemporalData, for a collection of time series.} } - D. Tudball, “Black Scholes 50th Anniversary,” Wilmott, vol. 2023, iss. 125, 2023.
[Bibtex] [Abstract]How time flies when you are making money
@article{WILM:WILM11124, title = {{Black Scholes 50th Anniversary}}, author = {Tudball, Dan}, year = 2023, journal = {Wilmott}, publisher = {Wilmott Magazine, Ltd}, volume = 2023, number = 125, doi = {10.54946/wilm.11124}, issn = {1541-8286}, url = {http://dx.doi.org/10.54946/wilm.11124}, abstract = {How time flies when you are making money} } - P. Wilmott, “The Marketing Department’s Derivation of Black-Scholes-Merton: An alternative history from a parallel universe,” Wilmott, vol. 2023, iss. 125, 2023.
[Bibtex] [Abstract]There are many derivations of the Black-Scholes-Merton partial differential equation and formulæ for the value of derivatives. Some are easy to understand, some are not. Some are easy to generalize, some are not. But to my knowledge only one derivation comes from a collaboration between someone wearing a fine pair of Crockett & Jones, and the other definitely not.
@article{WILM:WILM11125, title = {{The Marketing Department's Derivation of Black-Scholes-Merton: An alternative history from a parallel universe}}, author = {Wilmott, Paul}, year = 2023, journal = {Wilmott}, publisher = {Wilmott Magazine, Ltd}, volume = 2023, number = 125, doi = {10.54946/wilm.11125}, issn = {1541-8286}, url = {http://dx.doi.org/10.54946/wilm.11125}, abstract = {There are many derivations of the Black-Scholes-Merton partial differential equation and formulæ for the value of derivatives. Some are easy to understand, some are not. Some are easy to generalize, some are not. But to my knowledge only one derivation comes from a collaboration between someone wearing a fine pair of Crockett & Jones, and the other definitely not.} } - P. Boyle, “How Black Scholes changed my life,” Wilmott, vol. 2023, iss. 125, 2023.
[Bibtex] [Abstract]Why the option model became the dominant paradigm of the author’s career.
@article{WILM:WILM11126, title = {{How Black Scholes changed my life}}, author = {Boyle, Phelim}, year = 2023, journal = {Wilmott}, publisher = {Wilmott Magazine, Ltd}, volume = 2023, number = 125, doi = {10.54946/wilm.11126}, issn = {1541-8286}, url = {http://dx.doi.org/10.54946/wilm.11126}, abstract = {Why the option model became the dominant paradigm of the author’s career.} } - A. Lewis, “The limit where Black-Scholes “works”,” Wilmott, vol. 2023, iss. 125, 2023.
[Bibtex] [Abstract]The seminal (Black and Scholes, 1973) publication celebrated in this issue introduced a (stock price evolution) model and an (option value) formula—two ideas worth distinguishing. Nowadays, the formula is used to represent option prices via an implied volatility, IV (T, K), where T is a time-to-maturity and K is a strike price. The formula is very useful. At the same time, because of the K-dependence, the model is strongly rejected in statistical tests. However, with T very large at fixed K, IV (T, K) typically flattens IV(T,K)→ σ∞imp , where σ∞imp is independent of K. Flattening happens both with real data and many (more complicated) models. At fixed strike, the implied volatility parameter tends to a pure constant. But a constant volatility returns us to the original BS model in a sense. As somewhat of an abuse, I say that in the limit, the BS model again works”. What is this mysterious σ∞imp and how do we compute it? How is the limit approached? Answering those questions is the subject of this note. While my approach is largely expository, results for non- standard cases in the Heston model are likely novel. Their analysis requires a generalized saddle point method.
@article{WILM:WILM11127, title = {{The limit where Black-Scholes "works"}}, author = {Lewis, Alan}, year = 2023, journal = {Wilmott}, publisher = {Wilmott Magazine, Ltd}, volume = 2023, number = 125, doi = {10.54946/wilm.11127}, issn = {1541-8286}, url = {http://dx.doi.org/10.54946/wilm.11127}, abstract = {The seminal (Black and Scholes, 1973) publication celebrated in this issue introduced a (stock price evolution) model and an (option value) formula—two ideas worth distinguishing. Nowadays, the formula is used to represent option prices via an implied volatility, IV (T, K), where T is a time-to-maturity and K is a strike price. The formula is very useful. At the same time, because of the K-dependence, the model is strongly rejected in statistical tests. However, with T very large at fixed K, IV (T, K) typically flattens IV(T,K)→ σ∞imp , where σ∞imp is independent of K. Flattening happens both with real data and many (more complicated) models. At fixed strike, the implied volatility parameter tends to a pure constant. But a constant volatility returns us to the original BS model in a sense. As somewhat of an abuse, I say that in the limit, the BS model again works”. What is this mysterious σ∞imp and how do we compute it? How is the limit approached? Answering those questions is the subject of this note. While my approach is largely expository, results for non- standard cases in the Heston model are likely novel. Their analysis requires a generalized saddle point method.} } - J. Hull, “Why Has Black-Scholes-Merton Been So Successful? ,” Wilmott, vol. 2023, iss. 125, 2023.
[Bibtex] [Abstract]It is not because the model is a really good description of the way options are priced by the market.
@article{WILM:WILM11128, title = {{Why Has Black-Scholes-Merton Been So Successful? }}, author = {Hull, John}, year = 2023, journal = {Wilmott}, publisher = {Wilmott Magazine, Ltd}, volume = 2023, number = 125, doi = {10.54946/wilm.11128}, issn = {1541-8286}, url = {http://dx.doi.org/10.54946/wilm.11128}, abstract = {It is not because the model is a really good description of the way options are priced by the market.} } - A. Lipton and A. Reghai, “SPX, VIX and scale-invariant LSV∗,” Wilmott, vol. 2023, iss. 125, 2023.
[Bibtex] [Abstract]Local Stochastic Volatility (LSV) models have been used for pricing and hedging derivatives positions for over 20 years. An enormous body of literature covers analytical and numerical techniques for calibrating the m model to market data. However, the literature misses a potent approach commonly used in physics and works with absolute (dimensional) variables rather than with relative (nondimensional) ones. While model parameters defined in absolute terms are counter-intuitive for trading desks and tend to be heavily time-dependent, relative parameters are intuitive and stable, making it easy to steer the model adequately and consistently with its Profit and Loss (PnL) explanation power. We propose a specification that first explores historical data and uses physically well-defined relative quantities to design the model. We then develop an efficient hybrid method to price derivatives under this specification. We also show how our method can be used for robust scenario generation purposes—an important risk management task vital for buy-side firms.
@article{WILM:WILM11129, title = {{SPX, VIX and scale-invariant LSV∗}}, author = {Lipton, Alexander and Reghai, Adil}, year = 2023, journal = {Wilmott}, publisher = {Wilmott Magazine, Ltd}, volume = 2023, number = 125, doi = {10.54946/wilm.11129}, issn = {1541-8286}, url = {http://dx.doi.org/10.54946/wilm.11129}, abstract = {Local Stochastic Volatility (LSV) models have been used for pricing and hedging derivatives positions for over 20 years. An enormous body of literature covers analytical and numerical techniques for calibrating the m model to market data. However, the literature misses a potent approach commonly used in physics and works with absolute (dimensional) variables rather than with relative (nondimensional) ones. While model parameters defined in absolute terms are counter-intuitive for trading desks and tend to be heavily time-dependent, relative parameters are intuitive and stable, making it easy to steer the model adequately and consistently with its Profit and Loss (PnL) explanation power. We propose a specification that first explores historical data and uses physically well-defined relative quantities to design the model. We then develop an efficient hybrid method to price derivatives under this specification. We also show how our method can be used for robust scenario generation purposes—an important risk management task vital for buy-side firms.} } - J. Bouchaud, “Welcome to a post Black-Scholes World,” Wilmott, vol. 2023, iss. 125, 2023.
[Bibtex] [Abstract]Black-Scholes is simultaneously extraordinarily important and woefully flawed.
@article{WILM:WILM11130, title = {{Welcome to a post Black-Scholes World}}, author = {Bouchaud, Jean-Philippe}, year = 2023, journal = {Wilmott}, publisher = {Wilmott Magazine, Ltd}, volume = 2023, number = 125, doi = {10.54946/wilm.11130}, issn = {1541-8286}, url = {http://dx.doi.org/10.54946/wilm.11130}, abstract = {Black-Scholes is simultaneously extraordinarily important and woefully flawed.} } - D. Gatarek, “The principle of two models: the cases of Black-Scholes formula for interest rates and of Gaussian copula for credit ,” Wilmott, vol. 2023, iss. 125, 2023.
[Bibtex] [Abstract]In this article, I try to show that a given market segment needs at least two models: one as a pricing convention and one to run the portfolio of securities. These models should be related in such a way that the model to manage the books is an extension of the pricing convention. Financial modeling succeeded in the case of options, but it failed with the CDOs, resulting in the credit crunch.
@article{WILM:WILM11131, title = {{The principle of two models: the cases of Black-Scholes formula for interest rates and of Gaussian copula for credit }}, author = {Gatarek, Dariusz}, year = 2023, journal = {Wilmott}, publisher = {Wilmott Magazine, Ltd}, volume = 2023, number = 125, doi = {10.54946/wilm.11131}, issn = {1541-8286}, url = {http://dx.doi.org/10.54946/wilm.11131}, abstract = {In this article, I try to show that a given market segment needs at least two models: one as a pricing convention and one to run the portfolio of securities. These models should be related in such a way that the model to manage the books is an extension of the pricing convention. Financial modeling succeeded in the case of options, but it failed with the CDOs, resulting in the credit crunch.} } - W. Schoutens, “A contemporary view on the golden anniversary of the celebrated Black-Scholes-Merton model,” Wilmott, vol. 2023, iss. 125, 2023.
[Bibtex] [Abstract]Luckily, in 1973, normality was normal.
@article{WILM:WILM11132, title = {{A contemporary view on the golden anniversary of the celebrated Black-Scholes-Merton model}}, author = {Schoutens, Wim}, year = 2023, journal = {Wilmott}, publisher = {Wilmott Magazine, Ltd}, volume = 2023, number = 125, doi = {10.54946/wilm.11132}, issn = {1541-8286}, url = {http://dx.doi.org/10.54946/wilm.11132}, abstract = {Luckily, in 1973, normality was normal.} } - J. Andreasen, “Holes in Black-Scholes?,” Wilmott, vol. 2023, iss. 125, 2023.
[Bibtex] [Abstract]In this article, we provide a model-free test for whether the dynamic hedging argument actually works in practice and a quantification of how much jumps influence the delta hedge.
@article{WILM:WILM11133, title = {{Holes in Black-Scholes?}}, author = {Andreasen, Jesper}, year = 2023, journal = {Wilmott}, publisher = {Wilmott Magazine, Ltd}, volume = 2023, number = 125, doi = {10.54946/wilm.11133}, issn = {1541-8286}, url = {http://dx.doi.org/10.54946/wilm.11133}, abstract = {In this article, we provide a model-free test for whether the dynamic hedging argument actually works in practice and a quantification of how much jumps influence the delta hedge.} } - C. Alexander, “Can you Beat Black-Scholes at Delta Hedging?,” Wilmott, vol. 2023, iss. 125, 2023.
[Bibtex] [Abstract]Not a bad question given Black-Scholes assumes zero correlation between underlying price and volatility, the consequence of which is an entirely flat volatility surface.
@article{WILM:WILM11134, title = {{Can you Beat Black-Scholes at Delta Hedging?}}, author = {Alexander, Carol}, year = 2023, journal = {Wilmott}, publisher = {Wilmott Magazine, Ltd}, volume = 2023, number = 125, doi = {10.54946/wilm.11134}, issn = {1541-8286}, url = {http://dx.doi.org/10.54946/wilm.11134}, abstract = {Not a bad question given Black-Scholes assumes zero correlation between underlying price and volatility, the consequence of which is an entirely flat volatility surface.} } - L. Ballabio, “The Black-Scholes Model in QuantLib,” Wilmott, vol. 2023, iss. 125, 2023.
[Bibtex] [Abstract]Any remaining errors are our fault, not theirs.
@article{WILM:WILM11135, title = {{The Black-Scholes Model in QuantLib}}, author = {Ballabio, Luigi}, year = 2023, journal = {Wilmott}, publisher = {Wilmott Magazine, Ltd}, volume = 2023, number = 125, doi = {10.54946/wilm.11135}, issn = {1541-8286}, url = {http://dx.doi.org/10.54946/wilm.11135}, abstract = {Any remaining errors are our fault, not theirs.} } - U. Wystup, “Quick and Dirty – Short Cuts for Option Lovers,” Wilmott, vol. 2023, iss. 125, 2023.
[Bibtex] [Abstract]Highlighting a few shortcuts in option pricing, in the spirit of sanity checks, quick answers, and passing interview questions.
@article{WILM:WILM11136, title = {{Quick and Dirty – Short Cuts for Option Lovers}}, author = {Wystup, Uwe}, year = 2023, journal = {Wilmott}, publisher = {Wilmott Magazine, Ltd}, volume = 2023, number = 125, doi = {10.54946/wilm.11136}, issn = {1541-8286}, url = {http://dx.doi.org/10.54946/wilm.11136}, abstract = {Highlighting a few shortcuts in option pricing, in the spirit of sanity checks, quick answers, and passing interview questions.} } - M. Radley, “Quick Charge,” Wilmott, vol. 2023, iss. 125, 2023.
[Bibtex] [Abstract]Rimac Nevera/Honda Civic Type R
@article{WILM:WILM11137, title = {{Quick Charge}}, author = {Radley, Milford}, year = 2023, journal = {Wilmott}, publisher = {Wilmott Magazine, Ltd}, volume = 2023, number = 125, doi = {10.54946/wilm.11137}, issn = {1541-8286}, url = {http://dx.doi.org/10.54946/wilm.11137}, abstract = {Rimac Nevera/Honda Civic Type R} } - J. Darasz, “The Skewed World of Jan Darasz,” Wilmott, vol. 2023, iss. 125, 2023.
[Bibtex] [Abstract]Cartoon
@article{WILM:WILM11138, title = {{The Skewed World of Jan Darasz}}, author = {Darasz, Jan}, year = 2023, journal = {Wilmott}, publisher = {Wilmott Magazine, Ltd}, volume = 2023, number = 125, doi = {10.54946/wilm.11138}, issn = {1541-8286}, url = {http://dx.doi.org/10.54946/wilm.11138}, abstract = {Cartoon} }
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