FNCE30007 Chapter Notes - Chapter 12: Arbitrage, Discount Window, Cash Flow

• School: University of Melbourne
• Department: Finance
• Course: FNCE30007
• Professor: Federico Nardari

Document Summary

Expectation pricing framework = expected value of future cash flow streams discounted at an appropriate rate of return which compensates for the risk of that particular asset. No arbitrage = construct a replicating portfolio whose payoff replicates the payoff of the asset being valued. Assume investors are risk-neutral when valuing a derivative. Expected return on a stock is the risk-free rate. Discount rate used for the expected payoff on an option is the risk-free rate. Value at earlier nodes is the greater of. Delta = ratio of the change in the price of the stock option to the change in the price of the underlying stock.