25 lines
1.7 KiB
Plaintext
25 lines
1.7 KiB
Plaintext
CHAPTER 28
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Mathetnatical Applications
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In previous chapters, many references have been made to the possibility of applying
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mathematical techniques to option strategies. Those techniques are developed in this
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chapter. Although the average investor - public, institutional, or floor trader - nor
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mally has a limited grasp of advanced mathematics, the information in this chapter
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should still prove useful. It will allow the investor to see what sorts of strategy deci
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sions could be aided by the use of mathematics. It will allow the investor to evaluate
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techniques of an information service. Additionally, if the investor is contemplating
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hiring someone knowledgeable in mathematics to do work for him, the information
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to be presented may be useful as a focal point for the work. The investor who does
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have a knowledge of mathematics and also has access to a computer will be able to
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directly use the techniques in this chapter.
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THE BLACK-SCHOLES MODEL
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Since an option's price is the function of stock price, striking price, volatility, time to
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expiration, and short-term interest rates, it is logical that a formula could be drawn
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up to calculate option prices from these variables. Many models have been conceived
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since listed options began trading in 1973. Many of these have been attempts to
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improve on one of the first models introduced, the Black-Scholes model. This model
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was introduced in early 1973, very near the time when listed options began trading.
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It was made public at that time and, as a result, gained a rather large number of
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adherents. The formula is rather easy to use in that the equations are short and the
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number of variables is small.
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The actual formula is:
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