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To: rkral who wrote (179983)	12/22/2004 4:34:36 AM
From: Gordon Hodgson	Read Replies (2) \| Respond to of 186894

Ron, Re: "For a coin flip the probabilities for heads or tails are each 50%. But the coin never lands on edge." Imagine a risk free investment where you bet half on heads and half on tails, yet on every flip you make a near infinite fraction of a penny. The perfect risk free investment or arbitrage, if your formula is correct. A virtual money machine, from such a simple and elegant mathematical formula. Just bet Billions on one side and hedge it with Billions on the other side and add up the nickels. The problem is sooner or later the coin just may end up on it's edge, wiping out both bets. Long Term Capital Management (LTCM) thought they had a perfect arbitrage going using Black, Scholes, and Merton's formula. Only problem was that over time their arbitrage ended up on it's side so to speak, and before you could say oh s##$ the company was broke and infamous. All because of a flawed formula. And by the way a coin can end up on it's edge so that 50% of yours is really <50% by a theoretical small amount...for this example and arguments sake anyway.