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Learn about Valuation from a Master

Jul 01, 2009 in Equity Research Links, Interview Prep, Investment Banking

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Volatility Trading and Variance Swaps

Feb 03, 2008 in Columbia, Equity Research Links

I came across this presentation from my alma mater on volatility trading and variance swaps.Â It’s a presentation of an equity derivatives workshop to the financial math program, by Dresdner Kleinwort. The application of the Black Scholes model to the real world is discussed, including it’s limitations. Derman and his fruit salad are covered. This fruit salad came up in his first lecture, where he mentioned that if you are going to make a fruit salad of apples, pears and oranges, you could price this by adding up the costs of all of the ingredients, adding in manufacturing costs and so forth. Now if you only knew the price of the fruit salad and the cost of the apples and oranges in the salad as well as their relative proportions, you could figure out the cost of the pears. The volatility smile and trading examples are also provided.From the presentation:

Why is Black-Scholes used in practice?
Derman: â€˜In 1973, Black and Scholes showed that you can manufacture an IBM option by mixing together some shares of IBM stock and cash, much as you can create a fruit salad by mixing together apples and oranges. Of course, options synthesis is somewhat more complex than making a fruit salad, otherwise someone would have discovered it earlier. Whereas a fruit salad’s proportions stay fixed over time (50 percent oranges and 50 percent apples, for example), an option’s proportions must continually change. […] The exact recipe you need to follow is generated by the Black-Scholes equation. Its solution, the Black-Scholes formula, tells you the cost of following the recipe. Before Black and Scholes, no one ever guessed that you could manufacture an option out of simpler ingredients, and so there was no way to figure out its fair price.â€™

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Equity Research Links

Jan 30, 2008 in Equity Research Links

While looking up some things for someone, I came across some links on preparing for a job in the field of equity research.

Â Fundamental Equity Analysis: A PrimerÂ , David Nincic, Finance Project at Wharton

Tutorial Guide to Pitching a StockÂ , Darden Business School project

Â Primer on Securities Analysis (with special focus on industry analysis)Â by Linda Vincent, Kellogg School of Management.

A very useful textbook which goes into practical detail on equity analysis for wall street professionals is Applied Equity Analysis by James English.

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