# Tag Info

Accepted

### delta-hedging is failing

Regarding your 1st question, jumps are indeed unhedgeable. From a theoretical point of view, you might want to look at Merton's "Option pricing when underlying stock returns are discontinuous", the ...
• 8,059

### Throwing a dice and risk neutral probability

the information you provided is not sufficient to deduce risk neutral probabilities. You have to provide something like a price process from which risk neutral probabilities can be computed. Here are ...
• 1,446
Accepted

• 15.9k
Accepted

### Replication (binomial tree)

When the dividend is paid, the stock price on your tree should drop by the same amount. Ie if the dividend is 10 and the value of stock is 100 before the dividend at a node, you should change it to 90 ...
• 940

### Replicating Bloomberg Barclays index and sub-index monthly total and excess returns using constituent-level index-data

The devil's in the details. Here are a few things to check off the top of my head: Index constituents: The index is rebalanced only once a month, at the end of each month. We'd switch to the the ...
• 11.7k

### Is it possible to replicate the payoff of a portfolio of options taken from a set of strikes {K1}, given another set {K2} with the same underlying?

I assume that you want to minimize some error function of your replication. For simplicity, I will focus on the squared error integral below. Without loss of generality, let us assume that for some ...
• 6,554

### Pricing and hedging caps and floors on illiquid emerging markets

Just add to Dimitri's excellent answer, particularly regarding hedging: In terms of development, rates vol markets in EM tend to lag FX vol markets. So chances are there is some FX options trading ...
• 1,386
Accepted

### Hedging gamma, theta or other risks

In the Black-Scholes model Gamma and theta do not need to be hedged because the BS PDE says that they balance each other (I'll take $r = 0$):  \frac{\partial f}{\partial t} + \frac12 \sigma^2 S^2\...
• 1,854
Accepted

### Calculating the annual return on an option using a replicating porfolio

Your computation of $\Delta$ is correct. However, your computation of the cash amount is wrong. You choose the cash amount $\beta$ that you need to initially lend or borrow such that in the up state, ...
• 6,034

### Signs for the assets in a portfolio and definition of portfolio value

To sell the entire portfolio you need to sell one bond and buy three stocks. You have to buy the three stocks to get out of your short position held in the portfolio. The price of the portfolio is the ...
• 1,402
As you say, you simply differentiate with respect to $K$. Assuming your binary's maturity is $T$, note that in a Black-Scholes framework with constant risk-free rate $r$, by the Breeden-Litzenberger ...