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Pastimes : The Naked Truth - Big Kahuna a Myth
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To: bill meehan who wrote (16668)1/30/1999 9:17:00 AM
From: accountclosed  Read Replies (1) of 86076
 
You know what's great about Federal Reserve Chairman Alan Greenspan? If you're a spinmeister, you can spin his obtuse public comments on almost any subject in almost any way. What if he says the U.S. economy is slowing? ...But what about this lottery theory? CS First Boston analyst Michael Mauboussin wrote some very interesting things about this recently. "Standard finance theory say[s] that the greater the uncertainty, the higher the appropriate discount rate, and the lower the present value. Uncertainty, expressed as volatility, lowers value." Got it. Next: "Based on the widely used Black-Scholes model, option value is a function of the value of the underlying asset, a strike price, time, the risk-free rate and volatility. As options have asymmetric payoff schemes, volatility increases value." By asymmetric, he's talking about the fact that an option can only lose 100% of its value versus the possible increase in value in the thousands of percentage points.



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