Management of Financial Risk by 56lqR8b2

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									            Financial Risk Management
                                       Zvi Wiener
                                             Following
        P. Jorion, Financial Risk Manager Handbook
http://pluto.huji.ac.il/~mswiener/zvi.html     FRM       972-2-588-3049
                                        Chapter 6
                                         Options
                     Following P. Jorion 2001
                 Financial Risk Manager Handbook
http://pluto.huji.ac.il/~mswiener/zvi.html   FRM    972-2-588-3049
                  Assumptions of BS
      • The underlying price moves continuously
      • Interest rates are known and constant
      • The variance of returns is constant
      • Perfect capital markets
           • no transaction costs
           • short sales are allowed
           • markets operate continuously
           • price taking

Ch. 6, Handbook               Zvi Wiener          slide 3
                   r *                      r
  c  Se                   N (d1 )  Ke             N (d 2 )
   p  Se           r *
                            N (d1 )  1  Ke N (d 2 )  1
                                                        r


                             r *
           Se         
       ln   r
           Ke         
                         
  d1                 
                        2
  d 2  d1   
                                                               d       x2
                                                 1                   
                                        N (d ) 
                                                 2            
                                                               
                                                                 e     2
                                                                            dx
Ch. 6, Handbook                      Zvi Wiener                         slide 4
        Exchange Option (Margrabe 78)

    Max S , S         T
                        A     B
                              T    S   B
                                         T         
                                               Max S  S ,0
                                                       T
                                                        A   B
                                                            T       
    Min S , S        T
                       A     B
                             T     S   T
                                          A
                                                   
                                               Max S  S ,0
                                                       T
                                                        A   B
                                                            T      
                     2
                      AB         2  AB A B
                                  2
                                  A
                                          2
                                          B

      r should be replaced by the difference of
      yields of the two assets.
Ch. 6, Handbook                       Zvi Wiener                slide 5

								
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