John Hull Quotes

If each of your time steps is one week long, you are not modeling the stock price terribly well over a one-week time period, because you are saying that there are only two possible outcomes.

Our starting point then was trying to find a way to incorporate mean reversion into the HoLee model.

Briefly speaking, our conclusion is that stochastic volatility does not make a huge difference as far as the pricing is concerned if you get the average volatility right. It makes a big difference as far as hedging is concerned.

Risk models are a substitute for historical knowledge, because they tend to work with just three years' worth of data. But three years is not a long time in financial history.

Mea culpa, mea culpa. MIT and Wharton and University of Chicago created the financial engineering instruments, which, like Samson and Delilah, blinded every CEO. They didn't realize the kind of leverage they were doing and they didn't understand when they were really creating a real profit or a fictitious one.

The world of derivatives is full of holes that very few people are really aware of. It's like hydrogen and oxygen sitting on the corner waiting for a little flame.

I think the people who've been the most overconfident in our business in the last decade have been the people that called themselves risk managers.

Market risk is like taking a plunge into a cool pool ... a lot of people are finding out right now what their risk tolerance is.

I put heavy weight on certainty. It's not risky to buy securities at a fraction of what they're worth.

Confusing speculation with investment is always a mistake.

In the financial sector, those whom the gods want to destroy they first teach math.

You're looking for a mispriced gamble. That's what investing is. And you have to know enough to know whether the gamble is mispriced. That's value investing.

My client loved risk. Risk, I had learned, was a commodity in itself. Risk could be canned and sold like tomatoes.

Black-Scholes is a know-nothing system. If you know nothing about value - only price - then Black-Scholes is a pretty good guess at what a 90-day option might be worth. But the minute you get into longer periods of time, it's crazy to get into Black-Scholes. For example, at Costco we issued stock options with strike prices of $30 and $60, and Black-Scholes valued the $60 ones higher. This is insane.

Even defensive portfolios should be changed from time to time, especially if the securities purchased have an apparently excessive advance and can be replaced by issues much more reasonable priced.

Looking into it a bit, Jamie found that the model used by Wall Street to price LEAPs, the Black-Scholes option pricing model, made some strange assumptions.

No matter how skillful the trading scheme, over the long haul, abnormal returns are sustained only through abnormal exposure to risk.

The idea that you try to time purchases based on what you think business is going to do in the next year or two, I think that's the greatest mistake that investors make because it's always uncertain. People say it's a time of uncertainty. It was uncertain on September 10th, 2001, people just didn't know it. It's uncertain every single day. So take uncertainty as part of being involved in investment at all. But uncertainty can be your friend. I mean, when people are scared, they pay less for things. We try to price. We don't try to time at all.

I know many members of our community steer clear of Wall Street because of the perception that the stock market is risky, but I am convinced the biggest risk of all is not taking one.

LTCM lost money when Russia defaulted on a certain class of bonds, and then they had other investments like on the spread between two different kinds of shares of Royal Dutch Shell Oil Company. Now that seems completely unrelated to Russian bonds. But they were related because other hedge funds saw similar discrepancies and they were all making similar bets.

Greatest risk is not development of new product, but development of customers and markets

And then at the end of the day, the most important thing is how good are you at risk control. Ninety-percent of any great trader is going to be the risk control.

One doesn't like instabilities in markets; they may be damaging, but probably not fatal, as the October '87 crash showed. It turned out to be essentially inconsequential. So if that's true, I'm not very worried about the welfare of those who are investing any more than I am about the welfare of those who go into casinos.

Derivative trading with mark-to-market accounting degenerates into mark-to-model. Two firms make a big derivative trade and the accountants on both sides show a large profit from the same trade.

The globally constituted accident can be compared to what people who work at the stock exchange call 'systemic risk'.