Saturday, May 12, 2007
In yesterday's post, Macro Man described the rationale for static pricing of his one touches in terms of his in house option pricer giving values below his purchase price. This was a mistype; in fact, the pricer gave prices above the purchase price, hence the reference to low-ticking the ten year implied vol market.
Paying a price above mid-market is par for the course in illiquid securities, and should be reflected as such in P/Ls. Paying a price substantially below mid-market looks like P/L fiddling, hence the decision to mark the one touches at cost.