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GMAT As Financial "Call Option"

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GMAT As Financial "Call Option" [#permalink] New post 24 Dec 2012, 13:24
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A contributing staff member would like to share his insights on what the GMAT exam means for your career. He is a credit derivatives trader and sees the GMAT exam as a "call option" on your career. Take a look:

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So what do you think?

Do you see the GMAT exam as a financial "call option" on your career?
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Last edited by GMATPill on 26 Dec 2012, 19:46, edited 1 time in total.
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Re: GMAT As Financial "Call Option" [#permalink] New post 25 Dec 2012, 09:29
One of the best posts on GC.
Great analogy and the thing in the box (on when to take the GMAT) is what I always advise people to do. Take it early enough, when you are in a good shape.
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Re: GMAT As Financial "Call Option" [#permalink] New post 25 Dec 2012, 20:21
Hmm interesting read. The only disagreement that I would have with this analogy is that taking the GMAT is not entering into a legal trading contract by taking opposite sides of a bet with a counterparty.

Ie for you to take a profit by buying a call option in the financial markets, the counterparty who sold you that option must take an equally-sized loss (discounting fees). Conversely if you take a loss by buying that put option, then the counterparty that sold you the option would take a equally-sized profit in that trade.

Of course by taking the GMAT, going to business school, and then making lots of money from your successful career, GMAC doesn't actually lose any money as a result of all of your successes, which is why the analogy is flawed.

Anyways interesting read, thanks for sharing, and kudos for the post!
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Re: GMAT As Financial "Call Option" [#permalink] New post 26 Dec 2012, 16:04
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BigBrownFox wrote:
Hmm interesting read. The only disagreement that I would have with this analogy is that taking the GMAT is not entering into a legal trading contract by taking opposite sides of a bet with a counterparty.

Ie for you to take a profit by buying a call option in the financial markets, the counterparty who sold you that option must take an equally-sized loss (discounting fees). Conversely if you take a loss by buying that put option, then the counterparty that sold you the option would take a equally-sized profit in that trade.

Of course by taking the GMAT, going to business school, and then making lots of money from your successful career, GMAC doesn't actually lose any money as a result of all of your successes, which is why the analogy is flawed.

Anyways interesting read, thanks for sharing, and kudos for the post!


Hi BigBrownFox -

I am actually the guest author of this article.

What you argue as "flawed" I argue as "awesome". What you are essentially saying is that the GMAT exam is such that there is unlimited upside for the taker, but the fictitious counter-party of the GMAT exam option doesn't "lose" that equal amount. Thus, the gmat is like a call option but without the one-for-one winner / loser scenario: everyone wins. In other words, it is even better than a call option.

Of course, such an instrument in which there is only a winner and no loser does not exist in the real world so the call option analogy was to me the most suitable way to explain the kind of asymmetry in the potential payoffs vs costs that one can experience by taking the GMAT.

Thanks for your viewpoint though. Another way to think about it is that this analogy is actually "conservative" in the sense that it is even better than the kind of payoff the call option provides (in the sense that there is no loser, to stretch your view of looking at it). And isn't it better to be conservative rather than agressive?

Cheers,

Mikey
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Re: GMAT As Financial "Call Option" [#permalink] New post 26 Dec 2012, 20:07
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mikeynyc wrote:
BigBrownFox wrote:
Hmm interesting read. The only disagreement that I would have with this analogy is that taking the GMAT is not entering into a legal trading contract by taking opposite sides of a bet with a counterparty.

Ie for you to take a profit by buying a call option in the financial markets, the counterparty who sold you that option must take an equally-sized loss (discounting fees). Conversely if you take a loss by buying that put option, then the counterparty that sold you the option would take a equally-sized profit in that trade.

Of course by taking the GMAT, going to business school, and then making lots of money from your successful career, GMAC doesn't actually lose any money as a result of all of your successes, which is why the analogy is flawed.

Anyways interesting read, thanks for sharing, and kudos for the post!


Hi BigBrownFox -

I am actually the guest author of this article.

What you argue as "flawed" I argue as "awesome". What you are essentially saying is that the GMAT exam is such that there is unlimited upside for the taker, but the fictitious counter-party of the GMAT exam option doesn't "lose" that equal amount. Thus, the gmat is like a call option but without the one-for-one winner / loser scenario: everyone wins. In other words, it is even better than a call option.

Of course, such an instrument in which there is only a winner and no loser does not exist in the real world so the call option analogy was to me the most suitable way to explain the kind of asymmetry in the potential payoffs vs costs that one can experience by taking the GMAT.

Thanks for your viewpoint though. Another way to think about it is that this analogy is actually "conservative" in the sense that it is even better than the kind of payoff the call option provides (in the sense that there is no loser, to stretch your view of looking at it). And isn't it better to be conservative rather than agressive?

Cheers,

Mikey



Good points.

BigBrownFox, you seem to suggest that GMAC is selling the call option and you are buying from them...and in that sense, GMAC is taking the opposite side of the trade.

Well, technically, that's not what's happening since GMAC is not on the opposite side. Our gain is not their loss.

Rather, GMAC is almost kind of like the exchange that charges you that fee for buying that call option from some imaginary ether. So perhaps something like the NYSE or NASDAQ that makes a small fee (not too different from the $250 fee to take the GMAT test) for each "trade" or test they administer.

The more people who take the test, the more exchange fees they will collect. Perhaps that may be a clearer way to draw the analogy. Counterparty and zero-sum games that are more common with OTC derivative contracts are probably not the best way to look at it.
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Re: GMAT As Financial "Call Option"   [#permalink] 26 Dec 2012, 20:07
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