# Tagged Questions

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### About the definition of a complete market

In Steven Shreve's book "Stochastic Calculus for Finance 2", Definition 5.4.8 says a market is complete if every derivative security can be hedged. What exactly does every derivative security mean? ...
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### Risk neutral pricing - Example from a book is correct?

I found the following example in a book on Model Risk, while trying to explain how risk-neutral pricing takes properly into account the risk involved in different investments. The Example is this. ...
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### Exercise: interpretation of terms in black-scholes

I have following exercise: This is what I did: \begin{align} C(K)&= e^{-r\tau} \mathbb{E}^\mathbb{Q}[((S_T - K)^+] \\ &= e^{-r\tau}\mathbb{E}^\mathbb{Q}[((S_T - K)\mathbb{1}_{S_T>K}] \\...
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### $\mathbb{P}$ and $\mathbb{Q}$ probability measure/distribution interpretations

I'm trying to understand probability distributions implied from market prices and was reading through this reference explaining the interpretation of $N(d_1)$ and $N(d_2)$ in the log-normal vol Black-...
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### What is the arbitrage opportunity in this simple one-period market?

I have a single period market, and three states, and I have 3 risky assets. I assume no interest. So I have three states $\Omega=\{\omega_1,\omega_2,\omega_3\}$. All assets start with the value 1, ...
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### $E[F_T] = F_0 \ \rightarrow \ \text{or} \ \leftarrow \ p = \frac{1-d}{u-d}$?

From Ch 12 in Hull's OFOD, we compute the risk-neutral probabilities for a futures contract: Later in Ch 17, futures options are valued, and we have the same result: In relation to ...
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### Estimating Parameters - Vasicek

The Vasicek model for the short rate $r_t$ is given by the SDE $$dr_t = \alpha(\beta - r_t)dt + \sigma dW_t,$$ where $W_t$ is a Brownian motion under the physical measure. I'd like to compute bond ...
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### Does a forward price have a drift component in any measure?

Going by intuition, a forward price should already take into account the drift in the underlying price process. Further, assuming interest rates are deterministic, the stochasticity in the forward ...
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### Good book about replicating portfolios

I want to know if anybody can suggest me a good textbook which explains in detail and in an understandable way how to create replicating portfolios of financial instruments like options "cash or ...