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.
where PV(X) is the present value of X (computed using a borrowing rate). If the above price restriction is violated we can arbitrage. ... • Underlying asset return is lognormally distributed with constant volatility and does not pay dividends. • Continuous trading is possible.
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