Explain Why It Has Proved Impossible To Derive An Analytical Formula For Valuing

1647 words - 7 pages

It's a very useful essay for those who are specialising in finance -Explain why it has proved impossible to derive an analytical formula for valuingAmerican Puts, and outline the main techniques that are used to produceapproximate valuations for such securitiesInvesting in stock options is a way used by investors to hedge against risk. It issimply because all the investors could lose if the option is not exercised before theexpiration rate is just the option price (that is the premium) that he or she has paidearlier. Call options give the investor the right to buy the underlying stock at theexercise price, X; while the put options give the investor the right to sell theunderlying security at X. However only America options can be exercised at any timeduring the life of the option if the holder sees fit while European options can only beexercised at the expiration rate, and this is the reason why American put options arenormally valued higher than European options. Nonetheless it has been proved byacademics that it is impossible to derive an analytical formula for valuing Americanput options and the reason why will be discussed in this paper as well as some mainsuggested techniques that are used to value them.According to Hull, exercising an American put option on a non-dividend-paying stockearly if it is sufficiently deeply in the money can be an optimal practice. For example,suppose that the strike price of an American option is $20 and the stock price isvirtually zero. By exercising early at this point of time, an investor makes animmediate gain of $20. On the contrary, if the investor waits, he might not be able toget as much as $20 gain since negative stock prices are impossible. Therefore itimplies that if the share price was zero, the put would have reached its highestpossible value so the investor should exercise the option early at this point of time.Additionally, in general, the early exerices of a put option becomes more attractive asS, the stock price, decreases; as r, the risk-free interest rate, increases; and as , thevolatility, decreases. Since the value of a put is always positive as the worst canhappen to it is that it expires worthless so this can be expressed aswhere X is the strike priceTherefore for an American put with price P, , must always hold since theinvestor can execute immediate exercise any time prior to the expiry date. As shownin Figure 1,Here provided that r > 0, exercising an American put immediately always seems to beoptimal when the stock price is sufficiently low which means that the value of theoption is X - S. The graph representing the value of the put therefore merges into theput's intrinsic value, X - S, for a sufficiently small value of S which is shown as pointA in the graph. When volatility and time to expiration increase, the value of the putmoves in the direction indicated by the arrows.In other words, according to Cox and Rubinstein, there must always be some criticalvalue, S`(z), for every time...

Find Another Essay On Explain why it has proved impossible to derive an analytical formula for valuing

'It Is Impossible To Be Both A Participant And An Observer.' How Far Do You Agree?

997 words - 4 pages going on and so may loose some vital information maybe because he/she wasn't' watching or listening well enough.Researchers social characteristics like age, sex, social class, and ethnicity may affect the relationship that he or she can develop. For example if the researcher was from a middle class background and the group being studied were from a low working class background, the researcher's attitudes may be different has he/she might find it hard to live and adapt to the life style of the working class. A new environment, new situations and new ways of living have to be mastered, and in a way not only displays that mastery but also retains research objectives.

An Impossible Single Voice for Native People

1132 words - 5 pages Throughout Canadian history, the Aboriginal narrative has often marginalized First Nations, making it exceptionally difficult for them to speak with a single voice. This constraint is far greater than it seems, given that ‘Aboriginal’ is an umbrella term that encompasses three larger groups: Indians, Métis, and Inuit, which are then further divided into subgroups of Native peoples. Differing land treaty agreements, the influence of Canadian

Text Book question and answer. Explain why it is important to you and how you would explain the concept to an employee that is new to the finance department

1015 words - 4 pages information related to the balance sheet. 3. T -- Assets = Liabilities + Net Assets. 4. T -- A ledger is a book (computer memory) in which we keep track of the impact of financial events on each account. 5. F -- Third party payers - are the tax payers. 6. T -- Inventories are good that have been sold. 7. T -- A ratio is any number compared to another number. 8. T -- Liquidity is a measure of the amount of resources an organization has that

In many ways, Television has proved to be one of the worst inventions of modern times. All too often, Television is harmful because of the shows it broadcasts and the way it is used in the home

1540 words - 6 pages choose for themselves. Families should spend more time together doing different activities that do not include watching T.V or any other movies. Television is an important form of communication but as everything else is it has its disadvantages and we should learn to work our way around them."« The Television Project : http://www.tvp.org/links.html"« Daphne Miller, M.D. "Television's effects on kids: It can be harmful" http

Explain fully why it is essential for organisations to continually train and develop their employees. How can the benefits you describe be measured?

2563 words - 10 pages consumption-orientated production.(P.Teague). This means that instead of having a single product marketed to the whole market we now have a vast selection of different products marketed to niche markets.(S. Birley) It is difficult for niche markets to utilise economies of scale, and there is also a high requirement for flexibility since the company may have to switch the production to an alternative product. As technology advances, new, faster

The Formula to an Easy to Understand Essay

929 words - 4 pages Headphones are a necessity for many people in today’s society. Headphones allow a person to listen to music without disturbing others; therefore people are listening to music all day while they eat, sleep, or work. In Derek Thompson’s essay, “How Headphones Changed the World”, Thompson addresses the problem of why workers use headphones even if studies have shown that it interferes with their productivity levels. Thompson effectively uses

An assesment of the United Nations and why it has failed in its duties

612 words - 2 pages and it has not evolved as originally envisaged. It was first comprised largely of the Allies of World War II who came together to prevent future aggression and promote humanitarian causes. It was intended to have a regular military force, which would be utilised for keeping the peace within rogue nations or intervening in military aggression between nations. Despite this, other than a few instances where the UN did have military involvement under

Explain Monetary Policy and how/why it is used to regulate Australia's economy

1167 words - 5 pages ratesThe Governor and the Treasurer agreed that the appropriate target for monetary policy is to achieve an inflation rate of 2-3 per cent on average, over the cycle, a rate sufficiently low that it does not materially distort economic decisions in the community. The inflation target is thus the centrepiece of the monetary policy framework. It provides discipline for monetary policy decision-making, and serves as an anchor for private sector

An Analytical Approach to Truth and Religion

6399 words - 26 pages and within of sectarian groups. The truth of Christianity can be seen as a special case of truth of historical religion. Christianity is treated as an authentic religion, for it is held to be a true religion. Even if the Christian faith has something to do with religious experience of the faithful, the Bible is not a neutral historical text. A Christian is not so much interested in general religious truths but in the particular truth of the

Why is it Difficult to Define an Aboriginal Person?

1413 words - 6 pages dominant society, they experience an identity threat” (29). How does one manage to give up their identity? Is it even possible? Ultimately, a loss of identity for Aboriginals is neither possible nor necessary as power relations between Aboriginal people and the government has evolved over time (24). As their relationships have grown to transcend political borders, the struggle for Aboriginal peoples within policy and policy-making often remains

Explain why is it important to analyse deviance in society. Using examples to illustrate your answer, discuss what such an analysis can tell us about the social and political implications of deviance

1372 words - 5 pages homosexuals has numerous consequences for them (Eitzen & Baca-Zinn: 2000).The tremendously negative reaction to homosexuals may inadvertently trap many of them into gay ghettos, and also cause extreme personal distress. In the instance of the latter, gays experiencing the disgust that heterosexuals have toward them, may accept society's negative label and regard themselves as sinners, criminals, and sick; thereby, in need of help. On the other

Similar Essays

Why It Proved To Be Impossible To Solve The Problems Created By Balkan Nationalism Before 1914

938 words - 4 pages Why It Proved to be Impossible to Solve the Problems Created by Balkan Nationalism Before 1914 Balkan nationalism was apparent in the years leading up to 1914 in two forms: The desire for expansion, or rather, self-determination, within the immediate region, and also in the support of Pan-Slav nationalism (a Russian idea). In the years from 1900 to 1914, this nationalism caused the key problems of mistrust and suspicion

Explain Why The Manufacturing Sector In The British Economy Has Declined Since 1979? What Steps Are Currently Being Taken By The Government To Arrest This Decline?

2186 words - 9 pages manufacturing in the UK is not due to an inevitable economic processes like economic maturity.Another popular theory accounting for Britain's decline in manufacturing is that of crowding out. It argues that the market in the UK has been crowded out by the public sector which has experienced a large increase since World War II. This crowding out is a problem for the whole economy because the public sector does not create market output that can be

Explain Why Voter Turnout Has Been Declining In The Past Half Of The Century And Why Voter Turnout In Presidential Years Is Higher Than That In Midterm Elections

932 words - 4 pages good.The other major factor for the decline in voting is public "apathy". According to many people, we are faced with a situation where people just do not care, do not pay attention, are lazy, or do not find the political scene exciting enough. A variation of this explanation is that people see non-voters as simply interested in other things, giving political participation a low priority. Or perhaps it is because those choosing not to vote have not

Total War In The Twentieth Century Has Proved To Be An Agency Of Social Division Rather Than Of National Integration

1771 words - 7 pages Total War in the Twentieth century has proved to be an agency of social division rather than of national integration.Total War has been described as war which "draws from every political, social, economic and cultural sphere of a nation state" . The first major example of this is the First World War. It is clear that this war changed society and had wide ranging effects on the nations directly involved in the war. However, the extent to which it