Table of Contents
Bibliography
Hull, John C. Fundamentals of Futures And Options Markets. 9th ed. Upper Saddle River, NJ: Pearson, 2016. ISBN 978‑0‑13‑408324‑7.
Reading Notes
- Stock Returns Are Normal (Hull 2016, 294)
Black-Scholes-Merton … assumes that the return on the stock in a very short period of time, \(\Delta t\), is normally distributed.
In contrast, future stock prices are assumed to follow a lognormal distribution (Hull 2016, 295).
See Mathematics for the relationship between normal and lognormal distributions.- Stock Prices Are Lognormal (Hull 2016, 295)
Future stock prices are assumed to follow a lognormal distribution.
In contrast, stock returns are modeled using a normal distribution (Hull 2016, 294).
See Mathematics for the connection between normal and lognormal distributions.- Historical Volatility (Hull 2016, 299)
- Number of Trading Days (Hull 2016, 300)
Hull uses 252 as the average number of trading days in a year. However, Passarelli uses 256 instead of 252; see (Passarelli 2012, 62).
See Number of Trading Days for the reasons for discrepancies.- Assumptions Underlying Black-Scholes-Merton (Hull 2016, 301)
- Black-Scholes-Merton Equations (Hull 2016, 304)
Because the American call price, \(C\), equals the European call price, \(c\), for a non-dividend-paying stock, equation (13.5) also gives the price of an American call.
(13.5) is the call price question from Black-Scholes-Merton (BSM).
Black-Scholes-Merton is the same as Black-Scholes.- Implied Volatility (Hull 2016, 307)
- More in-depth than (Passarelli 2012, 62). Introduces a simple iterative method for estimating implied volatility. Includes a footnote mentioning that more advanced techniques exist.
- Stop-loss Strategy for Hedging (Hull 2016, 362)
- Not recommended.
- Greek Letter Calculation (Hull 2016, 362)
Calculating Greeks require choosing an option-pricing model.
- European options: Black-Scholes-Merton (BSM)
- American options: Binomial tree.
May use Black-Scholes for American calls for stocks without dividends; see (Hull 2016, 304).
- Delta Hedging Example (Hull 2016, 365)
- Ex 17.1
- Delta Calculation Example (Hull 2016, 365)
- Ex 17.2