Microsoft PowerPoint - PoF.ppt

The replicating portfolio 206

... Two equations, two unknowns (

'

0

and X

). 0

ƒ

Multiply (i’) by a number p’, (ii’) by a number q’ = 1-p’ and add them to get

()

(

)

()

()

.

1

1

)

(ii'

&

1

1

(^) )
(i'
0
1
0
0
1
0
1
0
0
1
⎞ ⎟ ⎠
⎛ ⎜ ⎝
− + ∆ + = +
⎞ ⎟ ⎠
⎛ ⎜ ⎝
− + ∆ + = +
S
T r
S
X
T r
V
S
H r
S
X
H r
V
Derivative securities: Options - Binomial asset pricing model
(
)()
(
)
(
)
.
1
~
~
1
~
~
0 1 1 0 0 1 1
⎞ ⎟ ⎠
⎛ ⎜ ⎝
−

• 
  
  
  
  • ∆
  
  
  
  


• 
  

  =

  
  


• 
  
  
  
  • S
    r
    T S q H S p X r
    T V q H V p