Tag Info

New answers tagged

0

The exercise is really not about replicating a call with asset or nothing. It is simply about the PDE of the delta of a call. The usual derivation of the BS equation starts by considering a portfolio short the option $$ \Pi_t = \delta^0_t B_t + \delta_t S_t - V(t,S_t) $$ Assuming the portfolio is selfinancing (and interest rate = 0), we get $$ d\Pi_t ...


0

I think the title here is misleading. Let's go back to the BS world with $r=0$ to $a(S_t)=S_t \sigma.$ In that case, all you are saying is that you can replicate a call option by holding $N(d_1)$ units of stock at time $t.$ What does this have to do with the second equation? I am guessing that this is the price process of an asset of nothing option with ...


0

Without getting into all the Math one thing should be clear that: Call option is equivalent to: long asset or nothing AND short cash or nothing options. You cannot replicate a call option without asset or nothing since replicating portfolio for long call requires holding N(d1) quantity of the underlying. Asset or nothing gives you this exposure directly. ...



Top 50 recent answers are included