Assignment sample - Ff options can only be priced because they can be replicated, why do we need them?

Ff options can only be priced because they can be replicated, why do we need them? Assignment example
High school
Finance & Accounting
Pages 4 (1004 words)
Download 0
Name Professor’s Name Course Date If options can only be priced because they can be replicated, why do we need them? Introduction Pricing of options is conducted on myriads of instruments where the achievement of dynamic replicating is closer to impossible…


Although derivatives are technically conspicuous reason being they can undergo replication using basic financial instruments, they are still the tools that provide those who participate in the market to full of risk to manage the particular risks. Nature of options dynamic replication Dynamic hedging of options is never conducted even with the market makers(Lussier & PareI, 2004). In nature, options are hard to deal with due to the technicality of the language used to describe the tools. The difference between dynamic and static hedging is small since hedging is only realized on minor positions. The risks taken by either parties are very different and highly distinguished, those with the buyer and distinct from those with the writer of the options hence asymmetry in the payoffs making it very hard for dynamic replication. Options also have the tendency of changing their character in a dynamically replicative way depending on whether they are in the money or out of the money. Dependent on this, is the fact that the value of out of the money option is the probability that at expiry the said option will have some value without dynamically replicating (Lussier & PareI, 2004). Dynamic replication assumes a constant movement of asset prices while the real prices of the assets can move non-constantly. ...
Download paper
Not exactly what you need?

Related papers

Use of Real Options Theory in Financial Management/Modeling
In every business, the need to estimate the future cashflow is very important. Businesses have to evaluate the cost of capital and also estimate the future returns that will accrue to the capital when it is invested. In so doing, there is the need for certain forecasting activities to be undertaken to ascertain the future worth of projects and the returns they would yield. From my previous…
8 pages (2008 words)
Financing Options for Larger Purchases
It is like a contract between two parties written for engaging in a transaction. The selling party must fulfill all the obligations written in the contract for the transaction while the buyers must also engage themselves in the particular transaction. Different financing options have different prices depending upon the value of the asset which is to be bought or sold. Usually the values of asset…
4 pages (1004 words)
Financing Options: "Newbe" Expanding Business
Finally, I have recommended the best financing options you should consider. Financing Requirements Before embarking on the types of financing that should be considered, it is worth noting something on financing requirements. The entrepreneur (or business management) should determine the amount of financing that is required to carry out the intended activities (going mass market), which is…
8 pages (2008 words)
Financial systems around the globe
Nowadays, there is a considerable change in these methods as the concepts of transaction cost and use of full information are removed and intimidation has increased in today’s financial market. It’s difficult to bring these changes with the traditional method of financing growth. There is also a tendency in the direction of cross border merger and acquisitions among great financial service…
6 pages (1506 words)
Close examination of global financial systems
After bringing up the main the main topic of the essay, we see that it makes a few valid points to argue about. Whereas the function of financial systems is argued, the performance of different types of financial systems is even more greatly argues. Banks in Germany are mainly accountable for the growth of the nation, having promoted and developed its industries. To them, more than any other group…
6 pages (1506 words)
Understanding the work of financial markets
The essay clearly discusses the role of the banks in bank-based system and market-based systems and the informational problems. Market based systems eliminate informational problems. You find that most information is publicly displayed in the market for public listed companies. Then the essay talks about the possible solution. The solution to this problem is to hire a single monitor to monitor the…
10 pages (2510 words)
Required: critically evaluate the following statement: Accounting regulation is at a crossroads : many believe that we need a
109). Also, companies operating in a certain country experienced difficulties while comparing their financial performance with foreign companies in the same industry. Consequently, users, preparers and regulators of financial reports recognized the need to develop a universal accounting regulation, which will ensure a universal disclosure framework (McEwen 2009, p. 110). This paper seeks to…
5 pages (1255 words)