同济大学金融衍生物定价理论课件 第三章.pptVIP

Chapter 3 Binomial Tree Methods ------ Discrete Models of Option Pricing An Example Question: When t=0, buying a call option of the stock at with strike price $40 and 1 month maturity. If the risk-free annual interest rate is 12% throughout the period [0, T], how much should the premium for the call option be? Example cont.1 payoff = Consider a portfolio Example cont.2 When t=T, has fixed value $35, no matter S is up or down Example cont.3 If risk free interest r =12%, a bank deposit of B=35/(1+0.01) after 1 month By arbitrage-free principle Example cont.4 That is Then This is the investor should pay $2.695 for this stock option. Analysis of the Example the idea of hedging: it is possible to construct an investment portfolio with S and c such that it is risk-free. The option price thus determined (c_0=$2.695) has nothing to do with any individual investors expectation on the future stock price. One-Period Two-State One-period: assets are traded at t=0 t=T only, hence the term one period. Two-state: at t=T the risky asset S has two possible values (states): , with their probabilities satisfying One-Period Two-State Model The model is the simplest model. Consider a market consisting of two assets: a risky S and a risk-free B If: risky asset and risk free asset known , when t=0, t=T, 2 possibilities Option Price at t=0? (for strike price K, expired time T) Analysis of the Model Question Analysis If known at t=T, how to find out when t=0? Assume the risky asset to be a stock. Since the stock option price is a random variable, the seller of the option is faced with a risk in selling it. However, the seller can manage the risk by buying certain shares (denoted asΔ) of the stocks to hedge the risk in the option. This is the idea! Δ- Hedging Definition Definition: for a given option V, trade Δ shares of the underlying asset S in th