Timeline for Replication of a call option by cash-or-nothing digital option
Current License: CC BY-SA 3.0
13 events
| when toggle format | what | by | license | comment | |
|---|---|---|---|---|---|
| Dec 3, 2014 at 9:20 | answer | added | AFK | timeline score: 1 | |
| Dec 2, 2014 at 22:56 | answer | added | Mark Joshi | timeline score: 2 | |
| Nov 30, 2014 at 6:14 | history | tweeted | twitter.com/#!/StackQuant/status/538939136586289152 | ||
| Nov 30, 2014 at 3:44 | answer | added | Taran | timeline score: 0 | |
| Nov 30, 2014 at 1:28 | comment | added | Richard | @emcor That is precisely the thing I did up there. I got $d \xi_t = \frac{ \partial V}{\partial S} a(S_t) dW_t$. But the strange thing is that not only the strategy for cash doesn't make sense, but also the PDE of U is not used at all. | |
| Nov 30, 2014 at 1:27 | comment | added | emcor | Do not try to learn from this forum by the way, go to the instructors/lecturers and let them explain it. You may use this forum additionally. | |
| Nov 30, 2014 at 1:09 | comment | added | emcor | $\xi_t$ is the current value of the EU claim, $V_t$ is the current value of a replicating portfolio for $\xi_T$ (not $\xi_t$), so yes apply Ito to $\xi_t$ only (see my previous answer to Black-Scholes replication). | |
| Nov 30, 2014 at 0:52 | comment | added | Richard | @emcor Also, I cancelled the quadratic variation with the first term due to the PDE. | |
| Nov 30, 2014 at 0:52 | comment | added | Richard | I applied the Ito's lemma to $\xi_t= V(t, \xi_t)$. Is that wrong? | |
| Nov 30, 2014 at 0:49 | comment | added | emcor | Ito's Lemma is not used on $V_t$ but on $\xi_t$ | |
| Nov 30, 2014 at 0:46 | comment | added | emcor | I think you are missing the quadratic variation term in Ito's lemma? Its $+\frac{1}{2}\partial_{SS}\xi_t dt$ | |
| Nov 30, 2014 at 0:34 | comment | added | Richard | Have I confused anything in this question? But the expression for $\phi_t$ just doesn't seem to work at all. | |
| Nov 30, 2014 at 0:15 | history | asked | Richard | CC BY-SA 3.0 |