Professional Documents
Culture Documents
Black-Scholes
( 2 * T ) Years S ln( X ) + rCC / year * TYears + 2 d1 = TYears
d2 = d1 TYears
European
Put
w/o
Dividends
PV UnitsBought ($$ ) = $ X
[(
) ]
(r)(T )
B = Xe(r)(T ) N ( d2 ) 1
Synthetic Borrowing
Replicating Portfolio Buy Shares of Underlying Stock = N(d1 ) Borrow B dollars Risk Free B = Xe(r)(T )N(d2 ) European Options w/ Known Cash Dividend Modify asset price and asset volatility by subtracting present value dividends before calculating Black-Scholes values.
= (Div1 )e(rcc )(TYear ) + (Div 2 )e(rcc )(TYear ) S S PV (Divs) S PV (Divs) = S (PVDiv1 + PVDiv 2 ) SModified = S (PVDiv1 + PVDiv 2 ) S S Modified = S S PV (Divs) Modified
European
Options
w/
Dividends
Paid
as
Perfectly
Predictable
Number
of
Units
of
the
Underlying
(EAY)
l =e
( )(T *)
1 = stdev CC returns
l = (1 l%)
1 52
in the denominator
European Call Portfolio w/o Dividends at t=0 Long shares of underlying; borrow B at repo rate. Put-Call Parity based on the Law of One Price Put=(owning -1 shares of stock)+(investing PV(X) + B Dollars risk-free). Call=(owning shares of stock)+(investing B dollars risk- free)
Subtract cash dividend from S at Nodes of Dividend yield 3) At this node, value of the option is the greater of the two. Start at the end and work toward the frontbackward induction.
C = S + B S X = C
OR
Straddle Short Volatility=Sell Straddle Long Volatility=Buy Straddle Sell/Buy equal number of calls and puts where So=X
X(1+
Open InterestSum of only net long positions. Dollar Gain/Return=(Change in Price)(Quantity) Initial Dollar Investment is only the amount of margin one needed to put down.
which will be more than $X if forwards trade at a premium. To Lend $X To Spot Market Buy $X of the underlying on spot market and short the same amount of forwards. Will receive # ofUnits(F $ST ) , which will be more than $X if forwards trade at premium. Determining Markets Expectation of Future Dividend
$X =# ofUnits and go long same So number of forward units. Will repay # ofUnits($ST F) ,
F = So
# ofContracts =
Expertise Transfer 1) Create new stock fund 2) Short futures of expertise 3) Long futures of broader market
(1+r )T (1+d )T
PortfolioSize MarketValueOfPosition
Portfolio Beta
New = Old +
ValueIndex(PositionNeeded ) ValueStock(Portfolio)
Expected Spot Price FV(NIB), then plug that into Expected Spot Price formula
Slope =