5
Concepts
5
Formulas
1
Decisions
3
Quiz Questions
5 concepts covered in this module.
Derivatives priced so no riskless profit is possible. If mispriced, arbitrageurs act to restore equilibrium.
A derivative can be replicated by a portfolio of the underlying and risk-free asset. Replication cost = derivative price.
Forward price = Spot × (1+r)T + Storage - Convenience yield. For financial assets: F = S(1+r)T.
c + PV(X) = p + S. Links call, put, bond, and stock prices. Violation = arbitrage opportunity.
Model stock as up/down moves. Calculate option values at nodes. Discount back using risk-neutral probabilities.
5 essential formulas for this module.
Where: S = spot, r = risk-free rate, T = time
Where: q = continuous dividend yield
Where: c = call, p = put, X = strike, S = stock
Where: u = up factor, d = down factor
Where: Discount expected payoff at risk-free rate
1 decision frameworks to guide your analysis.
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No-Arbitrage Pricing
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