L Pch20
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1. Derivatives valuation relies on the no-arbitrage rule which states that derivatives prices must equal the price of synthetic replicating portfolios to avoid arbitrage opportunities. 2. There are two approaches to hedging derivatives positions to eliminate risk: static hedging using a riskless portfolio and dynamic hedging which requires constant rebalancing. 3. Futures prices are determined by the cost-of-carry model which equals the spot price plus the net costs of storing/financing the underlying asset over time.
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L Pch20
- 1. Investments Chapter 20: Derivatives Valuation
- 6. Valuing Stock Index Futures Exhibit 20.1 Determining the equilibrium price of stock index futures Source: From Introduction to Investments, 2nd edn, by Levy. © 1999. Reprinted with permission of South-Western, a division of Thomson Learning: www.thomsonrights.com. Fax 800 730-2215.
- 7. Valuing Currency Futures Exhibit 20.2 Determining the equilibrium price of foreign currency futures Source: From Introduction to Investments, 2nd edn, by Levy. © 1999. Reprinted with permission of South-Western, a division of Thomson Learning: www.thomsonrights.com. Fax 800 730-2215.
- 8. Valuing Commodity Futures Exhibit 20.3 Determining the equilibrium price of commodity futures Source: From Introduction to Investments, 2nd edn, by Levy. © 1999. Reprinted with permission of South-Western, a division of Thomson Learning: www.thomsonrights.com. Fax 800 730-2215.
- 10. Options: Call Option Boundaries Exhibit 20.6 Call option boundaries Source: From Introduction to Investments, 2nd edn, by Levy. © 1999. Reprinted with permission of South-Western, a division of Thomson Learning: www.thomsonrights.com. Fax 800 730-2215.
- 11. Options: Put Option Boundaries Exhibit 20.8 Put option boundaries Source: From Introduction to Investments, 2nd edn, by Levy. © 1999. Reprinted with permission of South-Western, a division of Thomson Learning: www.thomsonrights.com. Fax 800 730-2215.
- 18. Three Period Binomial Process: Stock Prices $25 28.75 21.25 2/3 1/3 33.06 24.44 2/3 1/3 18.06 2/3 1/3 15.35 2/3 1/3 38.02 2/3 1/3 20.77 2/3 1/3 28.10
- 19. Three Period Binomial Process: Call Option Prices $25 28.75 21.25 2/3 1/3 15.35 2/3 1/3 38.02 28.10 2/3 1/3 20.77 2/3 1/3 33.06 24.44 2/3 1/3 18.06 2/3 1/3 13.02 3.10 0 0 9.25 1.97 0 6.50 1.25 4.52
- 23. Option Valuation Models: The BS Model: IV Exhibit 20.11 Reaction of option price to increases in input parameters
Editor's Notes
- Myself, I created a 200-period binomial option pricing model once.
- By the way, note that this 3-period option is worth $4.52, which is much greater than the otherwise-identical 1-period call option value of $2.38.