Nematrian
/


Market Risk [13]

Go to: Summary | Previous | Next   
Bullet points include: Option pay-offs (for buyer of option), strike or exercise price K, price of underlying S: Call option = max(S – K , 0) = [S – K , 0]+ = (S – K)IS – K. Put-option = max(K – S , 0) = [K – S , 0]+ = (K – S)IK – S. Usually pricing algorithms based on equivalent hedging strategies. Which are dynamic through time. Underlying factor movements transformed into non-linear overall behaviour, even if underlying factors are Brownian. Pay-off not the only contributor to (instantaneous) hedging portfolio. Note similarities with Constant Proportional Portfolio Insurance (CPPI)

NAVIGATION LINKS
Contents | Prev | Next | ERM Lecture Series

Desktop view | Switch to Mobile