FIN 4414 Lecture Notes - Lecture 14: Option Style, Real Options Valuation, Risk-Free Interest Rate
15 Mar 2017
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Discrete outcomes in terms of realization of the underlying prices. Replicate option payoffs with securities which we know prices and payoffs for. > typically the underlying and the risk free security: black scholes option pricing model. Unlike binomial trees outcomes are continuous this model relies on a set of options. The stock underlying the call option pays no dividends during the call option"s life. There are no transactions costs for the sale/purchase of either the stock or the option. Unlimited borrowing and lending at the short-term, risk-free rate, which is known and constant. No penalty for short selling and sellers receive immediately full cash proceeds at today"s price. Option can only be exercised on its expiration date. Security trading takes place in continuous time, and stock prices move randomly in continuous time: put call parity. > call price, put price, stock price & risk free rate. Easy way to remember this = synthetic long options position.
