Addenda - Items to be Adjusted in the Next Revision.

Version 6.0, 1998-1999 (Previous Edition)

1. On p134 I discuss jump processes. I state correctly that if you have a jump diffusion, with positive diffusion coefficient and random jump amplitude, then you cannot form a riskless hedge portfolio. However, I forgot to state that this is also true (no riskless hedge possible) in the jump diffusion case with positive diffusion coefficient, and deterministic (i.e. non random) jump amplitude. See nice discussion in Cox and Rubinstein (1985, Chapter 7). The pure jump process (zero diffusion coefficient and deterministic jump amplitude) is perfectly hedgable of course, as is the non-jump diffusion process (both are continuous limits of binomial-type processes).
2. Unsolved Question 6.1.1 has been solved! See the Challenge Page.
3. The word "filed" in Q3.45 on p31 should obviously be "field."

Version 5.6, November 1997

1. "grizzly" on page 5 should obviously be "grisly"
2. "from first principals" on page 143 should obviously be "from first principles"
3. There is still somthing wrong with Answer 2.29 on page 85. Although the strategy sounds great, it does not gaurantee success. What do you do if the "mirror image" placement of your coin overlaps with your opponent's coin? You cannot change the "axis of reflection" (let me call it) because another coin may already lie in that spot. I still do not have a better solution to this.
4. In Answer 4.6 on page 162, I say "vertical asymptote at yield zero" when talking about the plot of bond price versus yield to maturity. This should obviously be "vertical asymptote at yield -1." The bond price is just the sum of all cash flows at yield zero.
5. The Lighthouse Problem: In Figure A.2 on page 88, the velocity triangle needs correcting. It should be in distance terms: replace V1 by omega x R x dt, replace V by Vxdt, and remove V2. The math is still correct, and so is the answer - it is just the picture that is wrong.
6. When discussing Albert Einstein on page 131, I say that he got his Nobel Prize for his 1905 Brownian Motion paper. In fact, his prize was for more general contributions to physics with an emphasis on optics (motivated I suspect by one of his other 1905 papers in the same journal).

Version 5.5, August 1997

1. In Table A.4 on page 96 in the quant answers, the final sum of k squared should obviously be k cubed.
2. On page 103 in the derivatives answers, I state that time decay is called "theta" and that it is negative for both puts and calls. Of course I should have said American puts and calls. Although theta is negative for European calls, it can certainly be positive for deep in-the-money European puts.
3. On page 225 in the options pricing appendex I state that the second term in Black-Scholes is "also how many bonds you must short." In fact it is the value of bonds you must short, not the number of bonds.
4. There is something wrong with Answer 2.29 (on page 85). My answer is not inspired enough. The table must be of a regular shape (circular, rectangular, ... ). You should play first. Put your first quarter in the centre and then "mirror" any move your opponent makes. If he is able to place a quarter, then so are you - you cannot lose. This strategy can fail if the table is of a regular shape but is not connected - eg an annulus. However, in this case you should simply let your opponent go first, and proceed as before.

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