I have a two-asset Black-Scholes model for a financial market: $dB_t=B_t r dt$ $dS_t=S_t(\mu dt+\sigma dW_t)$ I introduce a European claim $\xi=max(K,S_T)$ with maturity $T$, for some fixed $K$. I ...
I try to understand the derivation of the Black-Scholes equation based on the "constructing a replicating portfolio". From mathematical point of view it looks simple. We assume that: Stock prices ...
When holding vanilla options, you can cancel out, theoretically, all risk with dynamic (delta) hedging. Then you earn the "risk free rate of return". Why would you make such a portfolio when you can ...