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.
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.
The greatest of all gifts is the power to estimate things at their true worth.
We must look at the price system as ... a mechanism for communicating information if we want to understand its real function.
What is a cynic? A man who knows the price of everything and the value of nothing.
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.
A good trader with a bad model can beat a bad trader with a good model.
You can tell when a model is right. it is much more difficult to tell when a model is wrong.
To know value is to know the meaning of the market.
Only a fool thinks price and value are the same.
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.
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.
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
Last updated: January 9, 2011