yetanotheryacht t1_ixcs2ds wrote on November 22, 2022 at 1:55 PM

Reply to Mounting a pull up bar on a bumpy wall by Toitonic

Use a wooden board in between

yetanotheryacht t1_iqv209k wrote on October 3, 2022 at 9:05 AM

Reply to In Finance how is the value of a Derivative judged realistically? And how are Analysts suppose to use Derivatives to make fair assessments of banking solvency? by Dabbing_Squid

Derivatives have non-linear outcome on stochastic events. So you can not make linear predictions, only probabilistic guesses

For each derivative you model the probability ranges of their underlying assets changing value. You then take those outcomes to use for setting the expected value of the derivative. The problem is that this all assumes linear probability but the world is defined by big events, not small increments. So when a country invades another country or a pandemic hits, some of the underlying assets will change value in a highly unexpected way, and you probabilistic approach to pricing the derivative is wrong.

Think of derivatives as fire insurance: If you are the one who have sold the derivative you may have to be the one to pay out the insured amount. That is fine if only 1 in 10'000 houses catch fire, under normal conditions, but if 1000 houses are lost due to a wildfire, you have to pay out a lot more than you set aside because your model did not take this big event into account.