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5 votes

Black and scholes option pricing

Let us start by considering a bear spread strategy, consisting on long a European put with strike $K_2$ and short another European put with strike $K_1$. Then the payoff of this portfolio at expiry $T$...
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3 votes

In the derivation of the Black-Scholes PDE, using delta hedging, how is this linked to the risk neutral valuation?

It means that in the Black-Scholes framework (or more generally in a complete markets framework), since you can hedge all the risk away (by delta-hedging), you can price everything assuming that no ...
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0 votes

Why Drifts are not in the Black Scholes Formula

As several responses mention, the easiest to see it, is the replication. Please allow me not to use BS formula for options, it is easier to price a forward, and it will contain the important effect ...
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1 vote

Delta hedging when volatility is stochastic

How to Delta Hedge and the PnL is indeed affect if real volatility is not constant (either deterministic ou stochastic). The exactly difference will depends on the model choose. I don't recall this ...
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4 votes

Why is my put intrinsic value greater than my actual put value in BSM? Python code

The answer to your question: A European put option can be priced below intrinsic value in a high interest rate environment (such as r=0.1) when stock price is low enough. That is due to time value of ...
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  • 9,597
3 votes

Special Exotic Option Pricing Approach

For homework, I think that people in these forums like when the author explains his current progress/ideas/intuitions. Try to follow the following steps: Create a plot with axes: $x=S_T, y=\text{...
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