...Wall Street loves to make convexity sound complex (I suppose it’s so they can charge higher fees?). We speak Greek (calling it “gamma”), employ physics as a metaphor (analogizing to it “acceleration”), and use mathematical definitions (since it is the second derivative of the asset’s price change)."Pish. Posh." is a technical term only used by market professionals.
Pish, posh. An investment is convex if the payoff is unbalanced for equally opposite outcomes. So if there’s the potential to earn a profit of two on a bet versus a maximum loss of one, the bet is positively convex. If you can lose three versus making two, it is negatively convex. That’s it. The rocket scientists are called upon to help (fairly) price the cost (value) of such possible outcomes. This is why the expansion of derivative trading in the 1990’s resulted in a hiring spree of physics PhD’s....
And via Darren Rovell, sports betting maven:
Patriots 24JUST IN: A bettor at William Hill has placed a $74,430 bet on the Patriots to beat the Dolphins straight up (-1600). If they do, the bettor will net $4,651.85.— Darren Rovell (@darrenrovell) December 29, 2019
Dolphins 27
Oh dear.
