Daily Inspiration Quote by John C. Hull

Hull is puncturing a comforting myth in quantitative finance: that fancier models automatically buy you better prices. The first sentence is deliberately deflationary. If you calibrate to the right average volatility, a plain-vanilla Black-Scholes-style engine can land surprisingly close on many option prices. That’s not because markets are simple; it’s because much of the price level is dominated by the expected total variance over the option’s life. In other words, pricing is often a blunt instrument: get the main input roughly right and the market’s own implied-vol surface does a lot of the heavy lifting.

The second sentence is where the warning label goes. Hedging is not about the level of the price today; it’s about how your position behaves tomorrow, under paths the model pretends to understand. Stochastic volatility mainly reshapes the dynamics: how volatility clusters, how it mean-reverts, how it co-moves with the underlying (the leverage effect). Those features barely nudge a one-time price if the average variance is pinned down, but they can radically change the Greeks you rely on, the P&L distribution of a delta-hedged book, and the frequency with which your hedge blows through its assumptions.

The subtext is practical and slightly cynical: markets will happily quote you a price (implied vol) that makes your model look “right,” but they won’t subsidize your risk management. Mis-specify volatility dynamics and you may still mark close to market, then quietly hemorrhage in rebalancing costs and tail events. Hull’s intent is to steer readers away from model worship and toward the harder question: not “Can I price it?” but “Can I survive hedging it?”