Basics of Derivative Valuation

Gerhard Larcher
Additional contact information
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
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:sptchp:978-3-031-23873-4_3

Ordering information: This item can be ordered from
http://www.springer.com/9783031238734

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

Access Statistics for this chapter

More chapters in Springer Texts in Business and Economics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().