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 4 III. No Arbitrage Pricing Bound The general approach to option pricing is first to assume that prices do not provide arbitrage opportunities. Then, the derivation of the option prices (or pricing bounds) is obtained by replicating the payoffs provided by the option using
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