Put the cart before the horse
Seated on a wide tan leather couch, in front of a black screen, I am here once more with pen and pad in hand, I am almost there. I started with a hunch and brown wood panels separating me from my neighbour. Now I have a seemingly functional mechanism and light grey panels between her and I. The hedging strategy involved put options, stocks, call options and bonds. It promised competitive returns and reduced risk. It brought into question what it means to manipulate the share price and perhaps indicated the power of generosity and the worthlessness of the market.
Put + stock = call + bond
I push my hips as far back as they can go on the couch. Derivatives obtain their value from price movements in the underlying financial security. For example, call and put options derive their value from an underlying financial security such as a share or commodity. If the security increases in price, the call option will increase and the put option will decrease in price. If the security decreases in price, the put option will increase while the call option will decrease in price.
Sympathy + money = self-worth + joy
My meaning and value as an individual is yoked to the amount of money I make. If I make a lot of money, I am more valuable, respectable and have a greater sense of self-worth while the amount of sympathy I get decreases. If I do not make much money, my value and respectability decreases however I tend to evoke sympathy within others due to my inadequacy.
Put + stock = call + bond
I keep my shoulders back and my back straight. Call-put parity describes a relationship that should hold between call options, put options, stock price and a bond (the present value of strike price discounted using a risk free rate). If it does not hold, an arbitrage opportunity exists meaning that one can make risk free profit. Call-put parity states that the put option price plus the share price should equal the sum of the call option price and a bond provided the call and put option have an identical strike price and expiration date and the price of the bond at expiration is equal to the strike price.
Sympathy + money = self-worth + joy
Self-worth-sympathy parity describes a relationship that should hold between value and sympathy. If it does not hold, an arbitrage opportunity exists meaning one can extract seemingly underserved joy. Self-worth-sympathy parity states that sympathy plus money should be equal to the sum of self-worth and joy.
Put + stock = call + bond
I cross my right leg and lodge it under my buttocks to slightly lift my body of the couch. Another arbitrage opportunity exists when the interest rate one receives from a fixed income asset is greater than the cost of an at the money option divided by the current financial security market price. Put simply, if one deposits $100 in a bank account and they receive $10 and a call option for a $100 stock is $10, they are better off if they deposit their $100, receive $10 then purchase the $10 call option as opposed to purchasing the stock with their $100. Purchasing the option will result in an identical upside profile while eliminating down side risk relative to purchasing the share thus this is an arbitrage opportunity. However, these opportunities rarely exist, as if they do the market will rapidly correct itself to eradicate the potential for risk free profit. Often, the risk free rate of return will be lower than the cost of a derivative.
Sympathy + money = self-worth + joy
I feel joy when I write, think, make a joke, feel the sun tickle their calves, feel the weight of my duvet, hear my mother’s laugh, see smile of my little cousin and inspire wonder in a close friend. When I am filled with joy, I deepen my sense of self-worth and become more sympathetic towards others. This rarely happens because I lack courage. The courage to explore my desires, forgive, stand alone, be dependant, be kind and be generous.
Put + stock = call + bond
The spongy back pillows result in a one hundred degree angle formed between my thighs and back. When the risk free rate of return is lower than the cost of a derivative one could still create an arbitrage opportunity. If one was to provide insurance to call option writers; that is sell a contract that would cover call option writers if the price of the underlying security increased, this would convert call options into fixed income assets from the call option writer’s perspective. This would increase the supply of call options which would decrease the price of call options. The decreasing call option price would result in a fall in the value of the the sum of the call option and bond. This should then cause a fall in the sum of the put and stock. A decline in the stock price will cause the value of the put option to increase thus for equilibrium to be reached the value to the stock will have to fall further to compensate for the increasing value of the put option. If one provides insurance to put option writers, this would result in a decrease in the sum of the put and stock and will results in call options becoming more valuable and put options decreasing in value which will further leading to an increase in the stock price for the equilibrium to be reached. The only way an equilibrium is reached is if the supply of call options was to increase and given price is rising, the desire to supply call options will reduce unless insurance is provided.
Sympathy + money = self-worth + joy
I may lack courage however I can still develop my sense of self worth. You were patient with me, listened to and pondered my ideas. You were curious and generous with your time which allowed me to divulge my insecurities, ambitions, quirks and inner most desires. You converted my ability to develop a sense of self worth from a fleeting to enduring; like converting a risky derivative to a risk free security. I then valued material wealth far less and seemed to garner sympathy amongst others for the reduced value I placed on money. To maintain the equilibrium, the value of money must fall. Conversely, if you had provided sympathy; that is feeling pity and sorrow for my shortcomings and misfortune, I would have experienced an increase in self-worth but also would have valued the power that allowed you to make me feel this way thus I would have placed a greater value in power which is often derived if not intrinsically linked to money. This is charity and this is destructive.
Put + stock = call + bond
I placed my left arm on the rigid arm rest. With the ability to alter the price of a stock, one can provide insurance for say call options at a given strike price, receive a premium then invest that premium in options of another stock. Provided the premium is greater than the percentage cost of the option relative to the market price one can make risk free profit. As one can alter the price of the stock, they can ensure that they do not have to make good one their obligations as an insurer by altering the supply of the appropriate option to prevent the options they have underwritten from becoming in-the-money options.
Sympathy + money = self-worth + joy
If sympathy abounds, money is of greater value. If self-worth abounds, the value of money declines. Being kind and generous to others is the right thing to do. Being kind and generous to ourselves is the right thing to do. You were to me and I am to myself. I have become joyful, courageous and experienced an unshakable internal sense of piece. I have become kinder, my sense of self worth has increased and the value of material wealth has declined. I feel a sense of freedom and fearlessness, a comfort in ambiguity and a desire to feel deeply and love bravely. Most of all, I am happy.
Changing the price of a derivative is the key to maximise profit and minimise risk. Pursue kindness and generosity and you will find what you seek; place the cart before the horse, the view is far more pleasant.
Seeing my reflection in the black screen, I move my bottom to the edge of the couch, remove my right leg from under my bottom, place both feet flat on the floor, lean forward until my nose edges past my toes, push off the arm rest with my left arm, straighten my legs and rise from the couch. It is finished.
Themes: finance, sequences and virtues
Your turn - Submit a 600 word piece of fiction below based on one of these three themes and a selection will be placed on the blog. Happy writing .