ALUAT ION B Y. Option Replication BOPM based on the idea that, since we have two traded assets underlying stock and risk-free bond and there are only two states of the world, we should be able to replicate the option payoffs That is, we sentencew be able to form a self-financing risk-less portfolio made up of the stock, the option and the risk- free asset. He has helped many people become smarter investors. An account may experience different results depending on factors such as timing of trades and account size. Wall Mount Range Hood with Soft Touch Controls, LED Lighting and Permanent Pur. It is for having removed the effect of. The 10 Best Affordable Plumbing Services Near Me.
We think you have liked this presentation. If you wish to download it, please recommend it to your friends in any social system. Share buttons are a little bit lower. Published by Lily Poole. Modified repilcation months ago. Option Dynamic Replication References: See course outline 1. Option Replication BOPM based on the idea dynamic replication put option 4 sentences, since we have two traded assets underlying stock and risk-free bond and there are only two states of the world, we should be able to replicate the option payoffs That is, we should be able to form a self-financing risk-less portfolio made up of the stock, the option and the risk- free asset.
Hedging and Valuation So the risk-less portfolio is worth 4. This portfolio is long 0. Self-financing ophion portfolio Because it is riskless, the portfolio can be made self-financing if we add 4. The value of the resulting self-financing replication portfolio is zero by construction and, if LOOP holds, its value remains constant, i. RN Probabilities Notice that, in order to interpret the q and 1 — q thus obtained as RN probabilities, they must be positive.
That is, we can derive them using LOOP alone but, to use them to price other derivatives written on the same underlying, we must assume NA. But, under LOOP, the value of the dynamically rebalanced portfolio must remain equal to zero from start to end. Dynamic Replication and Pricing In multi-period setting, delta-hedging leads to dynamic replication. This nails multi-period option prices down to NA values, by enforcing the LOOP alone. Conversely, given the price of the underlying asset with repliation the option is dynamically replicated, the NA option price can be obtained using RN valuation of multi-period payoffs.
Problems with Dynamic Replication LOCALLY i. The consequence is a possibly poor replication and hence poor pricing and hedging Interesting and important topic but to be left to more advanced courses. Using Futures for Delta Hedging The delta of a futures contract is e r-q T times the delta of a spot contract The position required in futures for delta hedging is therefore e - r-q T times the position required in the corresponding spot contract. Vega Srntences volatility is not constant Vega is the rate of change of the value of a derivatives portfolio with respect to volatility.
Implied Volatility N d 2 is the risk neutral probability of exercise The implied volatility of an option is the risk neutral volatility for which the Black-Scholes price equals the ssntences price The is a one-to-one correspondence between prices and implied volatilities Traders and brokers often quote implied volatilities rather than dollar prices.
Causes of Volatility Changes Volatility is usually much greater when the market is open i. Hedging in Practice Traders usually ensure that their portfolios are delta-neutral at least once a day Whenever the opportunity arises, they improve gamma and optiob As portfolio becomes larger hedging becomes less expensive. Portfolio Insurance continued Powerful tool Hull The Greek Letters Chapter Hull The Greek Letters Chapter 17 1.
Hull The Greek Letters Chapter 13 1. TYPES OF OPTION CONTRACTS n WHAT IS Dynamic replication put option 4 sentences OPTION? Definition: a type of contract between two investors where one grants the other. Introduction Greeks help us to measure the risk associated with derivative replicstion. Greeks also come in handy when we do local valuation of instruments. Hull Introduction to Binomial Trees Chapter 12 1. Financial options1 From financial options to real options 2.
Class 5 Option Contracts. Options n A call option is a contract that gives the buyer the right, but not the obligation, to buy the underlying security. Auth with social network:. Presentation on theme: "Option Dynamic Replication References: See course outline 1. Download ppt dynamic replication put option 4 sentences Dynamic Replication References: See course outline 1.
Hedging in the BOPM References: Neftci, Chapter 7 Hull, Chapter 11 1. The Greek Letters Chapter Chapter 18 The Greek Letters. FIN Risk Management Topic 3: Non-Linear Hedging Larry Schrenk, Instructor. Hull The Greek Letters Chapter 15 Pages. Option Pricing Models: The Black-Scholes-Merton Model aka Black — Scholes Option Pricing Model BSOPM.
The Greek Letters Chapter The Goals of Chapter How Traders Manage Their Exposures. Overview of Monday, October 15 discussion: Binomial model FIN Prof. Chapter 12 Binomial Trees. Binomial Trees Chapter Chapter 17 The Binomial Option Pricing Model BOPM. Chapter 11 Binomial Trees. Valuation of Financial Options Ahmad Alanani Canadian Undergraduate Mathematics Conference
Option Strategy - Creating a Synthetic Put Option
Discover the Signs & Symptoms of Ms and Checkout Ms Treatment Options!. Simplified Virtualization and Cloud Management for Your Power Systems. IBM PowerVC Virtualization Center. The Illusions of Dynamic Replication many of results of dynamic option replication can be for example, Taleb()).