# Tag Info

### How to derive the price of a square-or-nothing call option?

I provided an answer, based on an elementary approach, to an exactly same question yesterday. However, that question has disappeared, even though I like to keep a record for what I wrote. I would ...
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### How to derive the price of a square-or-nothing call option?

See this excellent paper by @MarkJoshi which defines/discusses the use of power numeraires. Starting from a dynamics specified under the risk-neutral measure $\mathbb{Q}$ \begin{align} &\frac{...
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### Contribution of an asset's variance to portfolio variance

In this answer, I am assuming that you want to keep correlations constant. To begin with, note that the $N\times N$ covariance matrix $\Sigma$ with element $\Sigma_{i,j}=Cov(x_i,x_j)$ can be written ...
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Accepted

### Boundary conditions Heston's stochastic volatility model

You can't really derive or prove boundary conditions. You impose them and try to economically motivate them. Let's consider a European-style call option and go through the boundary conditions step by ...
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### Clarification on Paul Wilmott's derivation of Ito's Lemma

Given my earlier comment, the only open question is how $\frac{1}{2}\frac{d^2F(X(t))}{dX^2}\delta t$ becomes $\frac{1}{2}\int^{t+\delta t}_{t}\frac{d^2F(X(\tau))}{dX^2}d\tau\,.$ A more standard proof ...
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Accepted

• 4,963
1 vote
Accepted

Let's try the mean formula, and you can then apply the same logic to variance and covariance. We have: $\mu_t=\left(1-\lambda\right)r_{t-1}+\lambda \mu_{t-1}$ Which means: $\mu_{t-1}=\left(1-\... 1 vote ### Delta-Gamma Neutral portfolio, derivation issue let$\frac{\partial C}{\partial S}=\delta_c$let$\frac{\partial^2 C}{\partial S^2}=\Gamma_c$let$\frac{\partial C_0}{\partial S}=\delta_0$let$\frac{\partial^2 C_0}{\partial S^2}=\Gamma_0\$ we ...
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