Risk-Neutral Valuation

Risk-Neutral Valuation - are valued by substituting the...

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Risk-Neutral Valuation The variable μ does not appear in the Black- Scholes equation. The equation is independent of all variables affected by risk preference. This is consistent with the risk-neutral valuation principle. 1
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Implied Volatility The implied volatility of an option is the volatility for which the Black-Scholes price equals the market price. There is a one-to-one correspondence between prices and implied volatilities. Traders and brokers often quote implied volatilities rather than dollar prices. 2
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The VIX Index of S&P 500 Implied Volatility; Jan. 2004 to Sept. 2009 3
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Dividends European options on dividend-paying stocks
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Unformatted text preview: are valued by substituting the stock price less the present value of dividends into the Black-Scholes-Merton formula Only dividends with ex-dividend dates during life of option should be included The dividend should be the expected reduction in the stock price on the ex-dividend date 4 American Calls An American call on a non-dividend-paying stock should never be exercised early. An American call on a dividend-paying stock should only ever be exercised immediately prior to an ex-dividend date. Use Blacks Approximation for American call with dividends. 5...
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This note was uploaded on 01/19/2012 for the course FIN 4520 taught by Professor Lucyackert during the Spring '12 term at Kennesaw.

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Risk-Neutral Valuation - are valued by substituting the...

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