By P. Glabadanidis

Absence of Arbitrage Valuation provides a unified asset pricing process via absence of arbitrage and applies this framework to such disparate fields as mounted source of revenue safety pricing, foreign currency echange spots, and ahead premiums.

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Extra resources for Absence of Arbitrage Valuation: A Unified Framework for Pricing Assets and Securities

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The opposite of an in-the-money option is an option that is out of the money. Finally, if the current 38 Absence of Arbitrage Valuation price of the underlying stock is exactly equal to the strike price then both the call and put options with that strike price will be at the money. The monetary payoff to a call option, CT , and a put option, PT , that the holder is entitled to receive whenever they are exercised at the maturity date T is as follows: CT = max (ST − X, 0), PT = max (X − ST , 0). 1 plots the payoff to a European call and put option from the perspective of both the buyer and the seller.

5) or decrease by 25% (D = −0. 5% (R = 0. 125). The initial stock price is $100, the bond price at t = 0 is $80, and we have to price a European put option on the stock with a strike price of $120 (X = 120) and two periods to maturity. The values and payoffs of all three securities are illustrated below: Stock Option $225 $0 $150 $100 ?? 5 ? 5 $75 ??? 25 54 Absence of Arbitrage Valuation It is easy to verify that for this model the risk-neutral probability is equal to 50% in either state and that both state prices are equal to 4/9: p = 0.

If the opposite holds, then the option value is no longer convex but is instead concave which makes no sense given the convex piecewise linear payoffs of call and put options. 3 Option Valuation There are two primary methods for option valuation. One involves continuous time mathematics and stochastic processes while the other one involves binomial trees. The latter is more intuitive and allows us to value some options that are impossible to value in the continuous time framework, so we will focus primarily on the binomial option pricing method in this section.

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