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Question: A "quant" (i.e., an analyst trained in the quantitative theory, including stochastic analysis) working for an investment bank derived a formula for the hedge d(t) for a contingent claim whose payoff depends only on stock value at T = 20. His supervisor inspected the formula and said that the formula seemed to be wrong because the hedge d(t) (i.e., the number of shares to be held at time t) was negative for t = 11 (for all possible values of the stock price) and it was positive at time t = 14, for all values of the stock price. Was the supervisor justified in his suspicions? In other words, is the given information sufficient to decide that the formula is incorrect?

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Category:- Basic Finance
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