Risk 1 - Hans Buehler
Risk 1 - Hans Buehler
Risk 1 - Hans Buehler
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Modeling <strong>Risk</strong> – Basics<br />
Black & Scholes<br />
• What does this formula mean?<br />
S(<br />
T)<br />
K = FV(0, S ) ( t,<br />
S(<br />
t))<br />
dS(<br />
t)<br />
— It tells us how to execute the hedge:<br />
FV(<br />
t<br />
<br />
today<br />
1<br />
dt,<br />
S(<br />
t1))<br />
= FV(0, Stoday)<br />
(0,<br />
Stoday)<br />
S(<br />
t1)<br />
T<br />
0<br />
<br />
S<br />
today<br />
<br />
Buy units of<br />
shares today<br />
and sell them<br />
tomorrow.<br />
Tomorrow’s<br />
option value<br />
— For two days:<br />
Today’s option<br />
value<br />
9
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