Derivatives_NYU_Lecture 1

Derivatives_NYU_Lecture 1 - Dynamic Assets & Option...

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22/04/2009 Sebastien Galy, NYU Poly Tech Institute & BNP Paribas – sgaly@poly.edu 1 Dynamic Assets & Option Pricing Sebastien Galy
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22/04/2009 2 Course Motivation Motivation: The purpose of this course is to focus on continuous time finance and assets pricing In its temporal setting asset pricing is denoted as “Dynamic Asset Pricing” (DAP). Broadly, DAP in a complete market seeks to reduce asset pricing problems to the identification of “state prices”, a notion that Arrow has coined, from which any security has an implied value as the weighted sum of its cash flows, state by state, time by time, with weights given by the associated state prices. Such state prices may be viewed as the marginal rates of substitution among state-time consumption opportunities, for any unconstrained investor, with respect to a numeraire good (Duffie, Survey, 2002).
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22/04/2009 3 This class Concept of filtration, completeness. Discrete time pricing Continuous time pricing Group projects on which you will be graded.
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EUR/USD and Randomness
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Regular Economic Events Country Event Actual Cons. Previous mars-29 20:30 US Treasury's Geithner Speech? 21:45 NZ Building Permits (MoM)?Feb)? 11.6% 11.6% 13.0% 23:50 J P Industrial Production (MoM)?Feb)? -10.2% Industrial Production (YoY)?Feb)? -31% mars-30 00:00 AU HIA New Home Sales (MoM)?Feb)? 8.3% 02:00 NZ M3 Money Supply (YoY)?Feb)? 6.9% 08:30 UK M4 Money Supply (MoM)?Feb)? 2.5% 08:30 UK M4 Money Supply (YoY)?Feb)? 17.5% 08:30 UK Mortgage Approvals?Feb)? 31K 09:00 EMU Consumer Confidence?Feb)? -33 Date (GMT) The market knows that these events will be released, some come unexpectedly from speeches and released via the media (Bloomberg, Reuters, CNBC, Newspapers Each of these announcements whether expected or not constitutes an event (with a given probability) As time goes by traders and investors build up experience as they understand how these shocks impact prices. Economists assume that the market never forgets these experiences/events so that the price today reflects it completely (if nothing more happened in terms of financial news or real activity (generates demand) the price would not move as there is no reason to atbitrage).
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Trader manages risk will monitoring information The experience built by the market is called a Filtration as is it is the increasing ensemble of all past events. Monitoring While the time increments for the release of new events is fixed, they can cluster particularly recently as Central Banks and Governments react quickly to the crisis and also try to influence market expectations. Hence, a trader will monitor rolling news headlines for anything relevant to the market as well as position himself ahead of key data releases. Option trader’s risks are a function of the sensitivity of their books to changes in underlying variables such as interest rates, equity or fx movements and their volatilities. They also have a flow risk which is less obvious – that open positions offered by one client will or will not be matched by the next incoming client. They also position their books according to movements they expect in each of these underlying variables (and their correlation).
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This note was uploaded on 04/05/2010 for the course FINANCE AN FRE6311 taught by Professor Galy,sebastien during the Spring '09 term at NYU Poly.

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Derivatives_NYU_Lecture 1 - Dynamic Assets & Option...

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