During this session we extended the binomial tree methodology to the pricing of European Puts and American Options. Remember that it is never optimal to exercise before expiry an American Call (w/o dividends). However, it may be optimal to exercise an American put (w/o dividends).
We also reviewed Delta (how the premium of the option changes when the price of the underlying asset changes). We saw how to form a Delta Neutral position by hedging with options and what is the role of Delta when calculating the hedging ratio.
Have a look at the presentation here and to an example of Delta Neutral portfolio here.
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