Abstract
Chapter 8 focuses on the valuation of options along with their applications to arbitrage and hedging. After a general introduction to derivatives markets and hedging, put-call parity is explored, with its application to collars as a hedging technique. One, two, and n-time period binomial pricing models are derived from the binomial hedge ratio. The Black-Scholes model is discussed along with its Greeks. Formation of delta and gamma neutral portfolios is explained. The Black-Scholes model is extended to FX options, which are applied to the management of exchange exposure. The Black-Scholes model is derived in the chapter appendix.
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