Basics of Derivative Valuation

Gerhard Larcher
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Gerhard Larcher: Johannes Kepler University of Linz

Chapter 3 in The Art of Quantitative Finance Vol.1, 2023, pp 189-272 from Springer

Abstract: Abstract We define frictionless markets and clarify what we mean by a “fair value” of a financial product in a frictionless market. Then we state and discuss the fundamental axiom in quantitative finance, the “no-arbitrage principle”. We give first applications of this NA principle and thereby derive the put-call-parity-equation and the formula for the fair price of futures. Finally, we provide the first steps towards the valuation of options: We define binomial stock-models, we give the formulas for the fair value of derivatives in such binomial models, and we show how hedging of derivatives in a binomial model is carried out.

Keywords: Frictionless markets; The no-arbitrage principle; Fair price of futures; Put-call-parity-equation; Luck and skill in games; The binomial stock-model; Derivative-valuation in a binomial stock-model; Hedging in a binomial model (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sptchp:978-3-031-23873-4_3

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DOI: 10.1007/978-3-031-23873-4_3

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