Download Advanced Equity Derivatives: Volatility and Correlation by Sebastien Bossu, Peter Carr PDF

By Sebastien Bossu, Peter Carr

In Advanced fairness Derivatives: Volatility and Correlation, Sébastien Bossu experiences and explains the complex ideas used for pricing and hedging fairness unique derivatives.  Designed for monetary modelers, choice investors and complicated traders, the content material covers crucial theoretical and useful extensions of the Black-Scholes model.

Each bankruptcy comprises various illustrations and a brief number of difficulties, overlaying key issues reminiscent of implied volatility floor types, pricing with implied distributions, neighborhood volatility types, volatility derivatives, correlation measures, correlation buying and selling, neighborhood correlation versions and stochastic correlation.

The writer has a twin expert and educational history, making Advanced fairness Derivatives: Volatility and Correlation the proper reference for quantitative researchers and mathematically savvy finance execs seeking to collect an in-depth figuring out of fairness unique derivatives pricing and hedging.

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Additional resources for Advanced Equity Derivatives: Volatility and Correlation

Example text

024, –1 < ???? < 1, s > 0. (b) Produce the graph of the corresponding implied distribution and compute the price of the “capped quadratic” option with payoff f (ST ) = min(1, (ST ∕S0 )2 ) using the numerical method of your choice. 797. ’s stock price since 1980. Based on this graph, you reckon that the stock price will remain above $14 within the next three years. i. Compute the probability that ST > 14 using the implied distribution. ii. Compute the value of the “capped quadratic” option conditional upon {ST > 14}.

In practice, only a finite number of strikes are available. While it is possible to overhedge convex payoffs with a finite portfolio of vanillas, exact replication cannot be achieved. FOCUS ON OVERHEDGING Exotic option traders often look at ways to overhedge a particular option payoff with a portfolio of vanillas, and price it accordingly. They will then underwrite the exotic option and buy the vanilla portfolio on the option market; at maturity, any difference in value will be a positive profit.

Is it really “free”? (b) Find a replicating portfolio for the “free” option using vanilla and exotic options. (c) Calculate the fair value of the “free” option premium using the BlackScholes model with 20% volatility, S0 = K = $100, one-year maturity, zero interest and dividend rates. 7 × S0 the option pays off max(1 + 3C, S3 ∕S0 ); Otherwise, the option pays off S3 /S0 . Assuming S0 = $100, zero interest and dividend rates, and 25% volatility, estimate the level of C so that the option is worth 1 using Monte Carlo simulations.

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