--%>

Conditions for deterministic stock price path equity option

Explain the conditions for assuming a deterministic stock price path for an equity option.

E

Expert

Verified

We have to impose several conditions upon the function r(t).
• Forward rates must be positive, or here will be arbitrage opportunities.
• Forward rates must be continuous (however this is commonsense rather than due to any financial argument).
• Perhaps the curve must also be smooth.

   Related Questions in Financial Management

  • Q : Fund Eurodollar loans You are an

    You are an investment banker advising a Eurobank regarding a new international bond offering it is considering.  The proceeds are to be utilized to fund Eurodollar loans to bank clients. What sort of bond instrument would you suggested that the bank consi

  • Q : Financing costs included into the

    Financing costs included into the capital budgeting analysis process. Explain.

  • Q : How many terms are in Black–Scholes

    How many terms are in Black–Scholes equation contained?

  • Q : Where are Monte Carlo simulations used

    Where are Monte Carlo simulations used?

  • Q : Define stochastic differential equation

    Define the stochastic differential equation with an expression?

  • Q : $-£ currency swap Assume Morgan

    Assume Morgan Guaranty, Ltd. is quoting swap rates as follows: 7.75 - 8.10 percent annually against six-month dollar LIBOR for dollars and 11.25 - 11.65 percent annually against six-month dollar LIBOR for British pound sterling. At what rates will Morgan Gua

  • Q : Conservative estimate of whole risk How

    How we get conservative estimate of the whole risk with a coherent measure of risk?

  • Q : Basic operation of a currency futures

    Illustrates the basic operation of a currency futures market.A futures contract is an exchange-traded instrument along with standardized features demonstrating contract size & delivery date. Futures contracts are marked-to-market day by day

  • Q : What is Volatility What is Volatility?

    What is Volatility? Answer: It is annualized standard returns’ deviation.

  • Q : Example of Risk-Neutral Valuation Work

    A stock whose value is now $44.75 is growing on average by 15 percent per annum. Its volatility is 22 percent. The interest rate is 4 percent. You need to value a call option along with a strike of $45, expiring in two months’ time. So, what can you do?