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tree
by
uC 1
.
uC 1 uT
by
constructed by writing
(S(t) X 00 ) (S(t) X 0 ) (X 00 X 0 ) .
Together with the risk-free investment, amounting to more than X 00 X 0 , we
shall therefore end up with a positive amount, realising an arbitrage profit.
The proof is similar for put options.
page 166, line 18
Replace P E (X 0 ) by P A (X 0 )
page 166, line 4
Replace the line
then we exercise both options held. In this way was shall achieve arbitrage
by
then we exercise both options held. If the option is not exercised at all, we do
not need to do anything. In this way was shall achieve arbitrage
page 167, Proposition 7.15
Replace the proposition by:
If S 0 < S 00 , then
C A (S 0 ) C A (S 00 ),
P A (S 0 ) P A (S 00 ).
page 167, proof of Proposition 7.15
Replace the proof by:
Suppose that C A (S 0 ) > C A (S 00 ) for some S 0 < S 00 , where S 0 = x0 S(0) and
S 00 = x00 S(0). We can write and sell a call on a portfolio with x0 shares and buy
a call on a portfolio with x00 shares, both options having the same strike price X
and expiry time T . The balance C A (S 0 ) C A (S 00 ) of these transactions can be
invested without risk. If the written option is exercised at time t T , then
we can meet the liability by exercising the other option immediately. Because
+
+
x0 < x00 , the payoffs satisfy (x0 S(t) X) (x00 S(t) X) . As a result, this
strategy will provide an arbitrage opportunity.
The proof is similar for put options.
page 167, Proposition 7.16
Replace the proposition by:
1 2
1 2
(T t)
(T t)
ln S(t)
ln S(t)
X + r + 2
X + r 2
d1 =
, d2 =
.
T t
T t
(8.11)
pages 203207
Replace by pages downloaded from
http://www-users.york.ac.uk/~tz506/m4f/M4F2003print corr pp203-207.pdf
page 211, line 13
Replace u
= 1.85% by u
= 1.8571%
Replace d = 1.70% by d
= 1.7070%
page 211, line 19
Replace C
= 14.1268% by C
Replace C
= 153.006% by C
= 14.8453%
= 153.9693%
Call options
Forwards
Calls with
risk-free asset
0.1087
0.0923
0.0931
0.0923
$1, 931.78
$2, 836.84
$15, 000.00
$15, 000.00
$9, 753.85
$14, 279.27
$788.75
$788.75
Investment
Market price
of risk
VaR at 94.23%
VaR at 99.41%
119.04. The short rate r(0) = 11.94% determines the money market account
as in Example 11.5, A(1) = 1.01, and we find x
= 96.25, y
= 24.40. Hence
by
at time 2
0.0184
0.0024
= 0.2564.
page 284, Solution
5.12
page 304
Insert reference:
Etheridge, A. (2002), A Course in Financial Calculus, Cambridge University
Press, Cambridge.
page 304
Replace
Jarrow, R. A. and Turnbull, S. M., Derivative Securities, South-Western College,
Cincinnati, Ohio.
9
by
Jarrow, R. A. and Turnbull, S. M. (1996), Derivative Securities, South-Western
College, Cincinnati, Ohio.
10