The Continuous Hedging Argument

Carl Chiarella, Xuezhong (Tony) He () and Christina Sklibosios Nikitopoulos
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Christina Sklibosios Nikitopoulos: University of Technology Sydney

Chapter Chapter 7 in Derivative Security Pricing, 2015, pp 145-156 from Springer

Abstract: Abstract This chapter develops a continuous hedging argument for derivative security pricing. Following fairly closely the original Black and Scholes (1973) Black, F. Scholes, M. article, we make use of Ito’s lemma to derive the expression for the option value and exploit the idea of creating a hedged position by going long in one security, say the stock, and short in the other security, the option. Security Alternative hedging portfolios based on Merton’s approach and self financing strategy approach are also introduced.

Keywords: Stochastic Differential Equation; Option Price; Excess Return; Risk Free Rate; Capital Asset Price Model (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:spr:dymchp:978-3-662-45906-5_7

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DOI: 10.1007/978-3-662-45906-5_7

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