Illustrates an example of complete and incomplete markets
Illustrates an example of complete and incomplete markets?
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The classic example is replicating an equity option, a call, say, by continuously buying or selling the equity so that you always hold the amount
Δ = e-D(T - t)N(d1).
With in the stock as:
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?
You are trying to save to buy a new $150,000 Ferrari. You have $40,000 today that can be invested at your bank. The bank pays 5.5% annual interest rate on its accounts. How long will it be before you have enough to buy the car?
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