Just now I am doing the last proof reading. This is very different than my Option Pricing Formulas book, and I would say very different from any other derivatives book. I have interviewed 16 expert modelers, philosophers, traders, and quants from the industry and academia about their models and their ideas. To do the interviews was very interesting and I learned a lot.
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Espen Gaarder Haug documents another weakness in our modern electronic fiat-currency system. Stock exchanges would not operate, banking systems would not function, and both credit cards and ATM machines would stop working. Haug writes in his latest research paper released April 18th.
I do not predict that a super solar storm will hit us tomorrow, the day after tomorrow or next year, or even the year after that. The probability for a severe solar storm hitting the earth the next few years based on our limited amount of historical data seems to be low. However, it is probably higher than most people would imagine. The potential effects of a solar storm hitting earth range from some communication satellites being knocked out, on the minimal damage side, to a global disaster of tremendous proportions.
The magnitude of the effect depends on a series of factors related to the severity of the solar storm and the level of preparation. The term stochastic means uncertain and unpredictable, but still we can say something about the type of uncertainty.
That means partly predictable. The number of sunspots on the sun is a good indication on some types of solar activity. For the last few years, there have been very few sunspots to observe on the surface of the sun. In the few years before and after year , there were a quite a lot of sunspots, according to Dr. The number of sunspots and the solar activity related to the probability of solar storms seems to peak around the time when the magnetic field of the sun is reverting.
Figure 1 shows the monthly average sunspot numbers from to The well known approximately The next solar cycle, that we now have entered, is known as Cycle An international panel of experts led by NOAA and sponsored by NASA has released a new prediction that it will peak around , with a below-average number of sunspots, the report says.
We have written records of both the storm and the storm. The NAS report unfortunately shows that even building an advanced warning system could give us very limited preparation time. Solar storms can move very swift, and a storm could actually hit us before the warning signals from the satellites reached us.
It, too, would have difficulty getting the information to us in time. This blackout was not related to solar activity, but, according to the final report from the U.
Today a similar solar storm could potentially cause a collapse in the monetary system, Dr. Espen Gaarder Haug concludes. But if the advantages of this form of modernization have come at the expense of robustness towards extreme cosmic events such as solar storms, the price paid for the convenience could be a very high one in the end.
ESPEN GAARDER HAUG PDF
He has worked as a trader for J. Together with Nassim Taleb , they claim that based on historical evidence that the formula itself was well known before Black-Scholes and Merton published in , and that it only was re-derived in a way not compatible with the way experienced traders use the formula in practice. The Black-Scholes and Merton derivation relay heavily on continuous dynamic delta hedging. An argument Haug and Taleb claim is not even close to robust in practice to remove most of the risk in options. They claim traders for a very long time had developed much more robust hedging and pricing techniques. This is outlined in detail in their well cited paper "Option traders use very sophisticated heuristics, never the Black-Scholes-Merton formula".
Dr. Espen Gaarder Haug
The Complete Guide to Option Pricing Formulas