Market Price vs Model Price
Keep observed quotes separate from calculated fair values.
Build the mental model first.
A market price is an observation with venue, timestamp and executable conditions. A model price is a conditional calculation under inputs and assumptions.
Keep observed quotes separate from calculated fair values.
Now make it exact.
Notation and units
Decimal rates and volatilities, year-fraction time and continuous compounding unless stated otherwise.
Every model has a price.
Educational conventions are stated explicitly and may simplify market quotation or settlement details.
Rates are continuously compounded unless the section says otherwise.
Inputs are deterministic in the base model.
“An unstated convention is a future reconciliation break.”— THEQUANTBATEMAN
Why a quant cares.
Calibration, relative-value analysis and governance depend on never confusing the two.
The hedge has opinions.
Start with the quote convention, then ask which Foundations risk survives the hedge. A number without its convention is merely well-dressed ambiguity.
Ask Bateman about this model →