10
votes
Accepted
Can someone explain rigorously Taleb's criticism of Nate Silver's election forecasting?
hope I am not too late to the party.
tl;dr Taleb's paper draws incorrect conclusions from a set of wrong assumptions.
In practice, the movements of the forecast at 538 are very much in line with what ...
- 116
8
votes
Can someone explain rigorously Taleb's criticism of Nate Silver's election forecasting?
Taleb argues that under uncertainty, election forecasts should be seen as a Binary option. A similar thought is presented by De Finetti's principle that probability should be treated like a two-way "...
- 1,426
5
votes
Accepted
Is the delta of a binary option the same as the delta for a regular European option?
No. The deltas are very different particularly when they are approaching the strike and expiry. You have one instrument that pays off linearly with the underlying and another that pays off either 0 ...
- 6,672
3
votes
Accepted
The shape of the volatility smile for bimodal outcome
According to the blog post you cited above, all you have to do is simply back out Black Scholes Implied Volatilities from the prices in the first part of the website.
For a given strike $X$, risk-free ...
- 7,140
3
votes
Accepted
Hedging a binary option close to expiry
The key point here is that when close to maturity a binary option should be hedged with a call spread.
Note that, for a binary option with a payoff at maturity $T$ of the form $\mathbb{1}_{S_T>K}$...
- 21.3k
3
votes
Why do we only need to buy or sell stock to hedge when the underlying is close to the strike?
This is due to the payoff structure of the digital option. The payoff is nothing while the option is out of the money and then instantly goes to a fixed payment amount when it is in the money. It does ...
- 6,672
2
votes
Is the delta of a binary option the same as the delta for a regular European option?
A binary call option with strike $K$ that pays either $0$ or $1$ at expiry can be replicated approximately by a call spread. For some small $\epsilon > 0$ go long $\epsilon^{-1}$ calls with strike ...
- 3,730
1
vote
Hedging/Arbitrage with multiple period binomial tree
Baxter and Rennie treat the multi-period model in chapter 2 and should be easy to follow.
The trick is to adjust the hedge ratio at every node. So you'll have holdings at time $t=1$ of $x_1$ and $y_1$...
- 8,621
1
vote
Why is the value of the Brownian motion bounded by the maximum value of this square difference?
Apologies upfront if my Finance is better than my grasp on the finer points of advanced calculus. I know the argument(s) he's making; and just hope someone more Quant than I can land the point home.
...
- 5,141
1
vote
Why do we only need to buy or sell stock to hedge when the underlying is close to the strike?
In the case of a digital or vanilla option, buying or selling stock to hedge an option only eliminates delta risk. Notably, when the strike is near the underlying price, gamma risk is particularly ...
- 3,025
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