Theory of Investment Portfolios and Derivative Securities
STATS 237

Summer 2016
Lecture 6: replicating strategy
and BlackScholes PDE
(Ref: Bjork Chapters 6, 7)
Hongsong Yuan
Stanford University
July 7, 2016
5
The BS model assumption
As usual, we assume a BlackScholes model where
1. the riskfree interest rate is ,
2. the risky ass
Theory of Investment Portfolios and Derivative Securities
STATS 237

Summer 2016
Lecture 4: continuous time
models
(Ref: Hull Chapters 13,14)
Hongsong Yuan
Stanford University
June 30, 2016
Announcements
Final Exam
Release: Friday Aug 12, noon (12pm)
Due: Saturday Aug 13, noon (12pm)
Format: takehome exam, electronic release and su
Theory of Investment Portfolios and Derivative Securities
STATS 237

Summer 2016
Lecture 5: Stochastic integrals
(Ref: Bjork Chapter 5)
Hongsong Yuan
Stanford University
July 5, 2016
4
Diffusion process
We say a stochastic process is a diffusion process if its local
dynamics can be approximated by
+ = , + , ,
where , is called the dr
Theory of Investment Portfolios and Derivative Securities
STATS 237

Summer 2016
Summer 2016 Stats 237
Theory of Investment Portfolios and Derivative Securities
Meeting Times: Tue Thu 9am10:20am.
Room: Skilling Auditorium
Website: canvas.stanford.edu (All lecture notes, assignments and announcements will be posted
through canvas.)
In
Theory of Investment Portfolios and Derivative Securities
STATS 237

Summer 2016
Lecture 7: derivative pricing of
dividendpaying assets
(Ref: Bjork Chapter 16)
Hongsong Yuan
Stanford University
July 12, 2016
Dividends
When a company issues a dividend, the cash that makes up the
dividend payment no longer belongs to the company.
Bec