高级公司金融Pricing Derivatives推荐.ppt

First we assume the u’s and d’s are constant over time then we have same risk neutral probabilities at each period. This calculation is equivalent to that we work backward from the end to the beginning, which applies only to the European option. The option value at each intermediate node comes from replicating the future payoffs of the option. This is equivalent to assuming holding the option to future. Therefore American put value is 8.2. An investor will not exercise at beginning, will not exercise at the up node. But she will exercise at the down node. The advantage of binomial model is that it not only determine the price of an option but also its optimal exercising strategy. We can also value an American put using tracking portfolio method. The difference is that at first period we should track (3, 17.5) not (3, 12) Whatever underlying process is assumed, derivatives can also be valued by the tracking portfolio approach and risk neutral approach. Here we introduce the tracking portfolio approach to derive the Black-Scholes formula. Derivative price should satisfy the Black-Scholes differential equation. All derivative price should satisfy this equation. The payoff of call option is asymmetric. It receives unlimited profits when stock price is higher but limited loss when stock price is lower. For put option, it enjoys the profit when stock price is lower but no loss when stock price is higher. Actually as long as the derivative payoff is a convex function of underlying asset price, volatility is good. The option price and implied volatility is one to one conrresponding. For derivative pricing we do not simulate the derivatives’ payoffs, instead we simulate underlying stocks’ price. Derivative payoff could follows complicated distributions. Simulating Binomial Process To price a derivative, it will be easier to simulate the price processes for the underlying asset (for example, stock) first. If we assume an N-period binomial process for the stock price, we need