Chapter 2: why is it quicker to compute OTM options?

This forum is to discuss the book "the concepts and practice of mathematical finance" by Mark Joshi.

Chapter 2: why is it quicker to compute OTM options?

Postby sunnyday » Thu Aug 08, 2013 1:44 pm

In chapter 2, p30 says that from the practical point of view, it is generally quicker to compute the value of OTM options than ITM ones as the values (of OTM) options are smaller. Would you please let me know why it is quicker if we can use black-schole formula?

On the same page, the second to last paragraph says as the value of call can be arbitrarily large, it makes some mathematical convergence arguments involving calls tricky. Would you please elaborate on the "convergence" point? What kind of convergence?

Finally, on p31, I see that markets will only quote the value of OTM options, leaving the cost of ITM options to be deduced. Based on the text, it suggests traders trade and quote OTM options but not ITM options because of pricing issues. Would you please discuss more on the pricing issues of ITM vs OTM options?

Thanks a lot!
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Re: Chapter 2: why is it quicker to compute OTM options?

Postby mj » Mon Aug 12, 2013 3:57 am

we are not working the context of the BS formula at this point.
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Re: Chapter 2: why is it quicker to compute OTM options?

Postby stive951 » Mon Oct 14, 2013 12:55 pm

I think (personal opinion) the objective of the book is to articulate the ideas behind the formulae rather than hammering through all the technical details. Mathematical ability wasn't an issue when reading the book for me despite the fact I am pretty weak myself. I think understanding the reasoning behind what is happening is key.
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