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Valuation and Pricing Assets and Derivatives

Trading securities and derivatives requires an understanding of how things are priced.

Wall Street firms do not guess when they calculate the values of bonds and options, even though many corporate treasurers still do. Guessing went out of fashion about ten years ago - ever since the derivative products markets began to flourish.

Andrew J. Kalotay and George O. Williams
"How to Succeed in Derivatives without Really Buying"
The Journal of Applied Corporate Finance, Fall, 1993

The price of an article is charged according to difference in location, time or risk to which one is exposed in carrying it from one place to another or in causing it to be carried. Neither purchase nor sale according to this principle is unjust.

St. Thomas Acquinas
c. 1264

The greatest of all gifts is the power to estimate things at their true worth.

Francis de la Rochefoucauld
1665

We must look at the price system as ... a mechanism for communicating information if we want to understand its real function.

Frederich August von Hayek
Individualism and Economic Order, 1948

What is a cynic? A man who knows the price of everything and the value of nothing.

Oscar Wilde
Lady Windermere's Fan

Models are like cars: you can have the best car in the world, but it won't stop you crashing if you don't drive it properly.

Mamdouh Barakat
Risk, April, 1997, p. 6

A good trader with a bad model can beat a bad trader with a good model.

William Margrabe
Derivatives Strategy, April, 1998, p. 27.

You can tell when a model is right. it is much more difficult to tell when a model is wrong.

Emanuel Derman
Derivatives Strategy, April, 1998, p. 28.

To know value is to know the meaning of the market.

Charles Dow
Money Talks
Rosalie Maggio, 1998, p. 123

Only a fool thinks price and value are the same.

Antonio Machado
Money Talks
Rosalie Maggio, 1998, p. 123

It is too simple to say that a stock is worth whatever peole will pay for it, because what people are willing to pay for it depends, in turn, on what they think it is worth. It is a circular definition, used as a rationalization of financial foolishness rather than as a rational way to appraise value.

Andrew Tobias
Money Talks
Rosalie Maggio, 1998, p. 122

As with a second-hand car, you never really know what an OTC option is worth until you actually sell it or buy it. Placing a value on it in the interim is, in some ways, only a more sophisticated version of pinning the tail on the donkey.

Richard Thomson
Apocalypse Roulette
1998, p. 149

The success of options valuation is the story of a simple, asymptotically correct icea, taken more serious than it deserved, and then used extravagantly, with hubris, as a crutch to human thinking.

Emanuel Derman
The Journal of Derivatives, Winter 2000, p. 64


I'm reminded by the signs I see driving around Connecticut:  "We buy junk; we sell antiques."  Clearly value is in the eye of the beholder.

Leslie Rahl
CFA Magazine
March/April, 2004, p. 30

 


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Last updated:  January 9, 2011