Cheating Paper Derivatives
Cheating Paper Derivatives
Cheating Paper Derivatives
At time t,
If we exit the forward contract at time t, you could first
derive the final payoff at time T, then discounted back
to time t to get the value of contract at time t.
If you are at short side, it is:
A European option gives its holder the right, but not the obligation, to
buy or sell a given asset (the underlying) for a pre-specified price (the
strike price) at a pre-specified date (the maturity date)
Options are not adjusted for dividends
Payoff of Call at T: , K is the strike price, Profit of the buyer should –
Option price
Moneyness of a call at any time t:
Out of the Money (OTM): St <K
In the Money (ITM): St > K
At the Money (ATM): St = K
Payoff of Put at T: , K is the strike price, Profit of the buyer should –
Option price
Put-Call Parity:
-
, is short forward contract with forward price K
We long forward contract with forward price
Then, -
=
Bull Spread, Long ITM Call , Short OTM Call () Bear Spread, Long ITM Put , Short OTM
Cashflow at time0: Call(, T)- Call(, T) Put ()
Cashflow at time0: Put(, T)- Put(, T)
Calendar Inequality:
Straddle: Long call and put at the same ATM Strangle, Long call and put , and put strike
price is smaller
Striking news: If if bull spreads, butterfly spreads and
calendar spreads all have positive values, then there is NO
static arbitrage in the option prices that you are quoting
L9 – Binomial Tree Models L12 – Delta Hedging
Rationale: Price the derivatives at the cost of hedge Delta: Sensitivity of the option price to a small increase in the price
, of the underlying
, where and could be calculated from 2 situation directly
Where, the latter is the expected return in Mars. Gamma: Sensitivity of Delta (∆) to a small increase in the price of
the underlying
Simulations: