Tagged Questions
3
votes
1answer
113 views
Replicating strategy in the Black-Scholes model
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 ...
6
votes
1answer
1k views
What is a self-financing and replicating portfolio?
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 ...
14
votes
3answers
1k views
Why hold options when you can dynamically replicate their payoff?
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 ...
