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Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study!
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To: Dan Duchardt who wrote (13734)6/26/2001 10:53:26 PM
From: Mathemagician  Read Replies (1) of 14162
 
But on the issue of the rule of 72, I think you are off a bit.

Unless I'm missing something, I think we said essentially the same thing. My point was that the law of 72 is an ad-hoc correction to the continuous approximation to discretely compounded interest. Granted, it may come from using higher order terms in an approximation (or approximating about r=.1) but performing that exercise would be silly when one could just experimentally try 71, 72, 73, etc. until you found the best approximation for interest rates near 10.

I never disputed the fact that the law of 72 works better than the law of 70 for annual compounding. I just thought it would be interesting to point out that the law of 72 is an adaptation of the law of 70, and show that it has real mathematical foundations rather than just being an arbitrary guideline. As a side note I'd be interested to know which is better for monthly compounding, a subject which I'm sure would interest short-term CC writers. I do admit, however, to not being sufficiently interested to investigate. A simple spreadsheet should do. :)

M

P.S. ln(1+r)->r iff r->0, so I'm not sure what you mean by your remark about convergence. Of course, I'm not sure why you are even taking a limit at all.
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