In my earlier post on this subject, I had written that I might possibly put the contents of the letter I wrote on this blog. On second thoughts, however, I decided that those contents were mostly a private matter between me and the person the letter was intended for, and so it won’t be a good idea to post it on the blog. However, there are a few lines which I came up with which I think I’m fairly proud of. So as to not to disappoint you readers completely, here is one of those:
There is no point in my narrating the Ramayana for a year and then you saying that you thought I was narrating the Mahabharata.
To compensate for not putting the full letter as promised, I am putting here Rahul RG’s excellent commentary on the issue. RG was 3 years my junior at NPS Indiranagar, IIT Madras and IIM Bangalore. It’s in the form of a GTalk conversation. It’s slightly longish so I’ll put it under the fold.
me: if you think the scope of finance and derivatives is getting limited, then you should read my latest blog post
12:04 AM Rahul: yes, just saw that
was thinking about it.
12:06 AM what was the underlying, again?
me: permission to hit on a girl
12:07 AM i asked her if she’s ok
Rahul: so you are modelling it as an option on an option, yes?
Rahul: thats what i was thinking.
Rahul: what i was thinking is that the underlying is like a binary payoff
12:08 AM me: yes
and i’m hedging against a NO
Rahul: which means if she is close but not entirely surely
then the delta blows up
too much da 🙂
but right now i’m shagging in the hedge
12:09 AM and also in gamma – i’m thrilled at the thought of coming up with this whole thing
Rahul: yes, i saw that 😛
it makes sense because if the girl is really out of your league then the option prices to zero because you really dont lose anything by trying
12:10 AM me: she isn’t exaclty “out of my league” but it’s long distance etc.
and so it’s hard to blade
it’s hard to make a positive impact for me going forward; so all i can do is to bank on the impact i made when i first met her
Rahul: ah okay
12:11 AM me: like say if i try chatting with her; i’ll be so nervous i’m sure to mess up; and obly i’ll need to be on guard and all that and it’ll hardly be enjoyable
so cost benefit analysis clearly points to long shot
12:12 AM Rahul: yes
me: cupid will commit suicide if he comes to know people are doing this kind of detailed analysis wrt louvvu; gamma delta vega hedge and all that
Rahul: haha, yes
but that was fun
Rahul: what of the effect of this transaction on future options?
12:14 AM me: ah interesting
i’ve assumed they’ll be uncorrelated
me: that future options won’t be correlated with this one;
Rahul: this is like black scholes with and without the vol smile
me: how da?
12:15 AM Rahul: because the market in the future is going to price in the fact that you are doing this.
women are going to talk, effectively.
12:16 AM and the effect of your mail may not be so potent in future cases.
which is the price you pay for this option
12:17 AM me: ah fair
hey can i blog this conversation sometime? in the next couple of days?
your fundaes are too strong
anyways i’ll crash now
office are there tomorrow
12:18 AM Rahul: oh yes, goodnight