still thought it was interesting to read through as i set my bb lineup
i have excerpted the most relevant piece.
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This brings me back to a concept I laughed at about 11 years ago when I was interviewing at Susquehanna. Susquehanna was a pioneer in the options trading world, and has a rigorous training program where they teach all new employees poker theory. The decisions one makes in poker in terms of expected value, having seen similar situations before, making quick calculations of the value of a bet, and being able to figure out what the person on the other side of the table is trying to do all have analogies to the trading world, which is why Susquehanna found it valuable to teach their employees this skill set.
Anyway, the interviews with Susquehanna were the most mathematically rigorous of any I've ever encountered. While most firms seemed content that as a math major from MIT I probably had some chops, Susquehanna wanted to see them. I'll never forget the first question in the interview, where the interviewer asked "what is the expected value of the number of heads if I flip a coin 1000 times." DYKWTFIA ?!?!? "500," I replied confidently. "And what's the standard deviation?" He handed me a pencil and paper and told me to take my time. I managed to grind out the answer (nope, I couldn't do it right now, 11 years later, but I can look up the methodology online (SQRT (n*p*(1-p)) and find that it's about 16). He then asked me for a 95% confidence interval of the number of heads one could expect in extended repetitions of 1000 flips - easy - 2 standard deviations, or a range of 468 - 532. Finally, he offered me even money on a series of coin flips where he'd bet that the total number of heads would be more than 532. Layup, right? I just did the math and knew it was a 40-1 prop. "Ok, I'll take it," I told him confidently.
The interviewer proceeded to explain to me that I knew the math - and that he KNEW that I knew the math, after all, he'd just watched me derive it. Why then, would I expect him to be offering me such a great wager? "Because you were testing me?" I hoped. No - it was because he had a guy on the floor of the CBOT who had trained himself to flip coins with a much better than 50% success rate for a desired outcome. The moral of the story was that you should always assume that the person on the other side of the trade thinks THEY have an edge too. The interviewer then asked me, and I swear this happened, although not in these exact words, "So let's say you calculate the fair value of an option to be $1.50, and you're in the crowd trying to buy 10,000. The market is relatively thin, and you are buying a few hundred options at a time. Suddenly, Goldman Sachs walks in and offers you 10,000. What do you do?"
"Take 'em!" The young, confident, and soon to be Kid Dynamite in me replied, "I know they're worth more, I've done the math." The interviewer shook his head, and said that GS wouldn't be selling them to me out of their generousity - that GS clearly had a different view, and that I should try to think of where my analysis could be wrong. Did I miss a dividend? Was there an imminent earnings event? Had news come out? This annoyed me greatly. "How can you ever trade then, if every time you trade you think that you might be on the wrong side of the trade or that your counterparty has more information than you do?" I was perplexed. The interviewer explained that it's not every time, and it's not every trade, but you should certainly be wary of eager and smart counterparties willing to put up sizable trades, and you should make darn sure you've triple checked your work....
more at: http://fridayinvegas.blogspot.com/2009/12/synthetic-cdos-spanish-21-and-sports.html