re : alex ' s paper comments :
1 . in the sentence between eqn . 3 and eqn . 4 , i think " annualized
volatility " should replace " annualized standard deviation . "
2 . as to the comment , " immediately we see something quite
counter - intuitive . " i would disagree . i think that its quite intuitive
that this model should get closer to the black - scholes price as what is
defined as the " jump " component becomes just part of the main price
distribution , which happens if we define a jump to be only a 1 - sigma
event . the table does show , however , that the results of using this model
are very sensitive to exactly how you choose to define a " jump " ( i . e . 2 - sigma
or 3 - sigma . . . events ) , and this is one difficulty in using the model in
practice .
3 . in the paragraph after the table , i don ' t understand the argument about
hedging the option . especially about buying a swap which would pay on the
difference between the strike and fs . this seems non - sensical .
4 . i could not follow the logic of the last two sentences of the article , so
this point should probably be explained more clearly .
- - stinson
vince j kaminski
08 / 18 / 2000 08 : 15 am
to : grant masson / hou / ect @ ect , stinson gibner / hou / ect @ ect , alex
huang / corp / enron @ enron
cc :
subject : alex ' s paper
minor changes i made to alex ' s paper .
vince
re : alex ' s paper
comments :
1 . in the sentence between eqn . 3 and eqn . 4 , i think " annualized
volatility " should replace " annualized standard deviation . "
2 . as to the comment , " immediately we see something quite
counter - intuitive . " i would disagree . i think that its quite intuitive
that this model should get closer to the black - scholes price as what is
defined as the " jump " component becomes just part of the main price
distribution , which happens if we define a jump to be only a 1 - sigma
event . the table does show , however , that the results of using this model
are very sensitive to exactly how you choose to define a " jump " ( i . e . 2 - sigma
or 3 - sigma . . . events ) , and this is one difficulty in using the model in
practice .
3 . in the paragraph after the table , i don ' t understand the argument about
hedging the option . especially about buying a swap which would pay on the
difference between the strike and fs . this seems non - sensical .
4 . i could not follow the logic of the last two sentences of the article , so
this point should probably be explained more clearly .
- - stinson
vince j kaminski
08 / 18 / 2000 08 : 15 am
to : grant masson / hou / ect @ ect , stinson gibner / hou / ect @ ect , alex
huang / corp / enron @ enron
cc :
subject : alex ' s paper
minor changes i made to alex ' s paper .
vince