ABSTRACT
It is shown in Chapter 7 and below that all options, including all the various financial options, can be valued by using a single formula, here referred to as the Carmichael equation,
OV = Φ × Mean of PW upside
where Φ is P[PW > 0] and the PW upside is the area of the PW distribution to the right of the origin (PW > 0). OV is an estimate of the option value. This applies for both call-style and put-style options. It assumes that anything favourable to the investor be classed as a cash inflow, and anything unfavourable as a cash outflow. That is, no distinction is made between buying and selling; rather each investment is interpreted from the viewpoint of the investor, not in any strict accounting sense. On knowing the distribution of PW, the option value can be calculated. The book’s preferred way to get to PW is a second order moment analysis, but any alternative method can be used.
