Transcription of Options: Valuation and (No) Arbitrage
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Options: Valuation and (No) Arbitrage
Foundations of Finance: options : Valuation and (No) Arbitrage Prof. Alex Shapiro Lecture Notes 15. options : Valuation and (No) Arbitrage I. Readings and Suggested Practice Problems II. Introduction: Objectives and Notation III. No Arbitrage pricing Bound IV. The Binomial pricing model V. The Black-Scholes model VI. Dynamic Hedging VII. Applications VIII. Appendix Buzz Words: Continuously Compounded Returns, Adjusted Intrinsic Value, Hedge Ratio, Implied Volatility, Option's Greeks, Put Call Parity, Synthetic Portfolio Insurance, Implicit options , Real options 1. Foundations of Finance: options : Valuation and (No) Arbitrage I. Readings and Suggested Practice Problems BKM, Chapter Suggested Problems, Chapter 21: 2, 5, 12-15, 22. II. Introduction: Objectives and Notation In the previous lecture we have been mainly concerned with understanding the payoffs of put and call options (and portfolios thereof) at maturity ( , expiration).
Foundations of Finance: Options: Valuation and (No) Arbitrage 7 IV. The Binomial Pricing Model A. The basic model We restrict the final stock price ST to two possible outcomes: Consider a call option with X = 110. What is it worth today? Definitions 1. The hedge portfolio is …
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