p. 39: It is not a mistake, as such, but a revision caused by changes in the marketplace. The U.S.
will move securities market settlement from T+2 to T+1 on May 28, 2024 (but there is no change for
U.S. government bonds or U.S. futures and options, which already trade T+1; most FX already settles T+1).
Canada moves to T+1 on May 27, 2024. India already made the shift to T+1 in 2023.
To the best of my knowledge, the U.K., Europe, Australia and N.Z. are remaining at T+2,
but are all under pressure to make the change and are consulting with stakeholders.
This affects the dividend timeline. After May 28, under T+1, the U.S./Canada ex-date and
record date will be the same. So, if you buy a stock the day before the ex-date, there will
be only one business day to get your name in the book of record.
Standard settlement is referred to as "regular way" settlement; after May 28, 2024,
"regular way" will mean T+1 in the U.S.
p. 65: There is a mistake in the argument on the lower half of p. 65, beginning where it says "Equation 3.8 still applies
away from ex-dividend dates..." I will revise and correct this for the sixth edition.
Samuelson (1965) is missing from the list of references. Samuelson, Paul A., 1965, Rational Theory of Warrant Pricing,
Industrial Management Review, Vol. 6 No. 2, (Spring), pp. 13-31.
At the bottom of p134, "max(Y,0)" should be struck out. At the top of p135, E[max(Y,0)] should be struck out in line 1 and line 3.
The dividend timeline on p. 39 is very much out of date. In September 2017, the U.S. (and Canada) moved to a T+2 settlement timeline.
So, there is now only one business day between the ex-date and the record date.
On p. 178 I say that CBOE Equity LEAPS expire only in December. This is no longer true. They now expire in
December, January, and June.
2nd Edition (Edition 2009) ISBN: 0-9700552-4-2
Footnote 19 on page 34 says F<=Se^(c(T-t)) for consumption commodities.
This is correct if c is the cost of carry *without* the convenience yield but incorrect otherwise.
Let r=interest rate, s=storage costs, q=dividend yield (zero here), and y=convenience yield. Then
the footnote should say F=Se^((r+s-y)((T-t))<=Se^((r+s)(T-t)). I thank Jerome Healy for finding this error.
On page 49, Restriction R8 contains a typo. "(C, or c)" should just be "C". R8 applies only to American-style options.
I thank a reader for finding this error. Note that Restriction R3c shows the biting effect of dividends. A deep-in-the-money
European-style call can easily be worth less than S-X if the dividend yield is high enough. You can bump up the dividends in
bbsGREEKS.xls (download from the main page) to see the European call price quickly dropping below S-X for
deep-in-the-money calls.
There is a careless mistake in Footnote 5 on page 3. The words "As a US immigrant from Europe..." should be
replaced by "As a US economist..." The story is correct, but the preamble is wrong.
1st Edition (Edition 2004) ISBN: 0-9700552-2-6
There is a careless mistake in Footnote 4 on page 4. The words "As a US immigrant from Europe..." should be
replaced by "As a US economist..."
Footnote 19 on page 40 says F<=Se^(c(T-t)) for consumption commodities.
This is correct if c is the cost of carry *without* the convenience yield but incorrect otherwise.
Let r=interest rate, s=storage costs, q=dividend yield (zero here), and y=convenience yield. Then
the footnote should say F=Se^((r+s-y)((T-t))<=Se^((r+s)(T-t)).
The HP12C code in Table A.3 is correct, but I fail to tell the reader
that if you have an HP12C Platinum you need to enter an extra 0 in Lines 71, 79, and 88. That is, for
example, Line 71 becomes: g GTO 077 (because the 12C Platinum uses three digits for line numbers).
Otherwise, the code is fine, although the screen display differs slightly
because of the new placement of some keys on the 12C Platinum. My code is in
RPN, so you have to have the machine in RPN, not ALG, before entering the code.
On page 157 in the box there are two errors. First, in the third equation from the top, the minus sign
in the exponent of the discounting term should be a plus. That is, the formula should read
E^*[S(T)|S(T) less than X] = e^{+r(T-t)}S(t)N(-d1)/N(-d2). Second, in the OP Quiz, my answer is no, but a reader
has pointed out that the answer is in fact yes! He has supplied the following formulae (which look
very good to my eye but which I have not yet checked in detail):
c=S0[1-X*Ebar[1/S(T)|S(T)>X]]N(d1) and
p=S0[X*Ebar[1/S(T)|S(T)>X]-1]N(-d1), where "Ebar" is the expectation taken with respect to
the stock-numeraire equivalent martingale measure. These results are really nice and do follow
from all the previous material. My experience has been that many people do not understand
risk-neutral pricing. Having this alternative equivalent martingale measure decomposition to
compare with and contrast to should help.
On page 190, m=(r+(1/2)sigma^2)*(alpha-1) should read m=(r+(alpha/2)sigma^2)*(alpha-1).
On page 196 I say "The jumps occur just infrequently enough that on average,
they balance the excess returns on the Black-Scholes hedge; and on average, the
hedge returns zero." I say this in the context of the general jump diffusion,
but in fact, it is not true at all. In the case of the jump with
diversifiable jump risk, the equilibrium return on the hedge is the
riskless rate. In the non-diversifiable jump case, the return when there is
a jump does balance the return during normal time to some extent,
but not well enough to make the equilibrium return on the hedge
equal to the riskless rate; the hedge is risky.