Black-Scholes and beyond: Option pricing models by Neil A. Chriss

By Neil A. Chriss

An unheard of ebook on choice pricing! For the 1st time, the fundamentals on smooth choice pricing are defined ``from scratch'' utilizing in basic terms minimum arithmetic. marketplace practitioners and scholars alike will learn the way and why the Black-Scholes equation works, and what different new equipment were built that construct at the luck of Black-Shcoles. The Cox-Ross-Rubinstein binomial timber are mentioned, in addition to fresh theories of alternative pricing: the Derman-Kani idea on implied volatility bushes and Mark Rubinstein's implied binomial timber. Black-Scholes and past won't simply aid the reader achieve a fantastic knowing of the Balck-Scholes formulation, yet also will deliver the reader modern by means of detailing present theoretical advancements from Wall highway. moreover, the writer expands upon present learn and provides his personal new methods to trendy alternative pricing thought. one of the subject matters lined in Black-Scholes and past: precise discussions of pricing and hedging strategies; volatility smiles and the way to cost innovations ``in the presence of the smile''; whole clarification on pricing barrier suggestions.

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Extra info for Black-Scholes and beyond: Option pricing models

Example text

Previous page < previous page page_46 page_47 next page > next page > Page 47 We have to consider several situations. First, we consider the case in which our initial profit, ℘ , does not cover the dividend payment (that is, ℘ < d). Then, first of all, we must make the dividend payment on the ex-dividend date. We would like to be able to do this without the use of additional funds, but because ℘ < d, this is impossible. Therefore, we must add cash into the investment. Now the question is, can we recapture this money?

Next we will discuss the different positions an investor can hold, and we will represent these positions mathematically in terms of their contribution to a portfolio of securities. The Long Position We say an investor is long a security if he or she owns it. We always assume that an investor can be long any security in any number of shares or any amount. What this means is that, in theoretical option pricing, we never discuss the issue of whether one can actually make the transactions, let alone at the market prices.

For a detailed analysis of the dividend structure of the S&P 500 index and its effect on option prices, see Campbell and Whaley (1992). In the text, we alluded to the differences between forwards and futures. For information on the difference between forward and futures prices, see Cox and Rubinstein (1985) and French (1983). For a study of the relationship between the S&P 500 futures price versus its spot price, see Kawaller, Koch, and Koch (1988). For more on exotic options, see Nelken (1995).

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