› CFA › CFA Level 2 › CFA Lvl 2 Derivatives. Risk Neutral, No arbitrage

CFA Lvl 2 Derivatives. Risk Neutral, No arbitrage

Add A Reply
Login
  • Author
    Posts
    • Avatar of projectpatprojectpat
      Participant
        • CFA Level 2
        26 Mar 2019 at 8:06 pm
        Up
        4
        Down
        ::

        Hi guys,

        Little confused about some of the derivatives stuff. What is the difference or the relationship between the risk neutral probability model of valuing calls puts, and the no arbitrage, and expectations approaches. Should they be considered as separate models?

      • Avatar of ec_testec_test
        Participant
          • CFA Charterholder
          27 Mar 2019 at 11:29 am
          Up
          2
          Down
          ::

          Hi there!

          They are different models:

          1. Binomial model – Uses up and down risk-adjusted probabilities
          Up probability = 1+Rf-D/U-D

          2. When you say the “no-arbitrage,” model I’m assuming you mean the European Put-Call Parity equation from which you could derive the price of a call or a put.

          C0 + PV(Bond)=P0 + Long Stock

          3. Expectation approach – It is the Black-Scholes-Merton Model

          Yes, they are different models and the vignettes will generally tell you which model to use to calculate the value of the call or put.   

      • Author
        Posts
      Viewing 1 reply thread
      • You must be logged in to reply to this topic.