190 Frequently Asked Questions In Quantitative Finance
is incorrect. Commonsense says all three are to blame.
Whenever you calibrate your model by backing out
volatility from supply-demand driven prices using a
valuation formula you are mixing apples and oranges.
To some extent what the quant is trying to do is the
same as the go-cart builder. The big difference is that
the go-cart builder does not need a dynamic model
for the prices of wheels and soapboxes, his is a static
calculation. One go-cart equals one soapbox plus four
wheels. It is rarely so simple for the quant. His calcula-
tions are inevitably dynamic, his hedge changes as the
stock price and time change. It would be like a go-cart
for which you had to keep buying extra wheels during
the race, not knowing what the price of wheels would
be before you bought them. This is where the math-
ematical models come in, and errors, confusion, and
opportunities appear.
And worth? That is a more subjective concept. Quan-
tifying it might require autilityapproach. As Oscar
Wilde said ‘‘A cynic is a man who knows the price of
everything but the value of nothing.’’
References and Further Reading
Wilde,The Complete Works of Oscar Wilde. Harper Perennial
