Almost everything in quantitative finance is built around one assumption: you hedge. You buy the option, you delta hedge, you eliminate risk, and the drift of the stock does not matter. Beautiful theory. But Chapter 59 of Wilmott’s book asks an uncomfortable question: what if you are not hedging?
After covering tulip mania and the South Sea Bubble, you might think Wall Street eventually learned its lesson. It didn’t. Chapter 3 of A Random Walk Down Wall Street is Malkiel’s tour through modern speculation, from the 1960s to the 1990s. And the twist? This time the “smart money” is doing the speculating.
Book: Financial Markets and Institutions, 11th Edition Author: Jeff Madura Publisher: Cengage Learning, 2015 Series: Chapter 13 Review
Futures contracts are basically agreements to buy or sell something at a specific price on a specific date in the future. Chapter 13 focuses on financial futures, which cover Treasury bills, Treasury bonds, stock indexes, and individual stocks. Two types of people use them: hedgers who want to reduce risk, and speculators who want to bet on price movements.
Here is a question that sounds simple but almost nobody answers honestly: why do you trade?
Not “to make money.” That is what everyone says. Harris dedicates Chapter 8 to pulling apart all the different reasons people actually show up to the market. And the taxonomy he builds is genuinely useful. Because if you do not understand why you trade, you are probably doing it wrong. And if you cannot figure out why the person on the other side of your trade is trading, you have no idea whether you are the smart money or the dumb money.