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Questions tagged [self-study]

A routine question from a textbook, course, or test used for a class or self-study. This community's policy is to "provide helpful hints" for self-study questions.

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46 views

Valuing a claim on $S^a$: This exercise/solution appears to have a mistake

The below exercise and solution was found in "Models for Financial Economics" by Abraham Weishaus. My issues are: In this problem, $S(t)$ does not satisfy the Black-Scholes framework because ...
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1answer
102 views

Simulating a stock price with Monte Carlo - Why my solution isn't equivalent to the author's

I am self-studying and I am working on the following problem: My solution is different and I'm arriving at a different answer: The parameters of the lognormal random variable $S_t/S_0$ are: $$m = \...
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1answer
63 views

Clarification on this author's solution for this problem on lognormal stock distribution

I am self-studying from a manual on financial economics, and I am trying to completely wrap my head around this solution: I'm trying to fill in the in-between steps of this solution based on first ...
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1answer
105 views

Problem solving using the put-call parity

I am self-studying for an actuarial exam on financial economics. I encountered this problem, and I am having difficulty seeing why the statement underlined is true: How do we know that $P(60) - C(60) ...
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1answer
137 views

Self finance conditions - proof check

Find expressions for the process $\psi=(\psi(t),\ 0\leq t\leq T)$ , so the portfolio $(\phi,\ \psi)$ is self-financing when: (1) $\phi(t)= \int_{0}^{t}S_{s}ds $ (2) $\phi(t)=S_{t}$ where $\phi(t)$ ...
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1answer
269 views

Why doesn't the overnight profit on a delta-hedged porfolio include interest on the initial selling/buying of the option?

I am self-studying and encountered the following passage from my textbook on the market maker's overnight profit on a delta-hedged portfolio: I don't understand why their isn't a factor of $(e^{r/365}...
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1answer
77 views

Is it possible to calculate the call-put parity for an option's portfolio?

Let's say I have designed an option's portfolio. The portfolio includes long as well as short positions in European-style put and call contracts based on the same underlying asset with different ...
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1answer
461 views

How to derive the formula for risk-neutral probability for a Standard Binomial Tree (Forward Tree)

Consider a standard binomial tree. Let $u = e^{(r - \delta)h + \sigma\sqrt{h}}$ and $d = e^{(r - \delta)h - \sigma\sqrt{h}},$ where $\delta$ is the continuously compounded dividend yield, $h$ is the ...
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1answer
122 views

Where am I making a mistake in my calculation of profit on a short-sale?

I am studying financial math and here is a problem and the solution from the author: Here are my calculations: The short sale is $200\cdot24.82 = 4964$. Now half of this amount will be taken for a ...
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0answers
26 views

Positive carry with negative yielding bonds when repo is negative

Could someone please explain to me how positive carry is achieved when the repo rate is negative? For example I can see the German repo rate is -0.57% and the 2 year German bund is -0.78%. So to ...
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0answers
238 views

How to calculate an option porfolio cost and payoff function?

There are call and put options on the same underlying asset, with the same expiry, $T$, and with strikes $K_c=(k_c^1, k_c^2, \ldots, k_c^m)$ and $K_p=(k_p^1, k_p^2, \ldots, k_p^m)$, $S_t$ is a price ...
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2answers
425 views

Understanding the payoff of currency options

I am self-studying for an actuarial exam and I am having a hard time understanding what happens when a currency option pays off. Consider the below problem. The payoff at $C_u$ would be $\max(x_u - ...
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1answer
230 views

Probability and statistics in Quantitative Finance

Certain types of traders attempt to repeatedly buy and sell the same asset for a profit over a short time period, such as high-frequency “market makers”. For example, if you can repeatedly sell a ...
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1answer
73 views

Why would a principal 'insist on a name' at the original price

A Dealing Certificate practice question What is a principal doing if he 'insists on a name' at the original price? Answer: He refuses the broker's compensation and demands that the transaction is ...
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1answer
127 views

Implicit relation between risk and reward

I want to differentiate w.r.t. $\sigma^2$ the following equation $u'(Y)\mu$ + $\frac{u''(Y)}{2}$$(\sigma^2 + \mu^2) = 0$ where we can consider $\mu$(reward) as an implicit function of $\sigma^2$(risk) ...