future trading strategy

Jun 28th, 2015
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Academy of Art University
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Derivative products are structured precisely for this reason -- to curtail the risk exposure of an investor. Index futures and stock options are instruments that enable you to hedge your portfolio or open positions in the market. Option contracts allow you to run your profits while restricting your downside risk.

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arXiv:math/0609212v1 [math.PR] 7 Sep 2006The Exact Value for European Options on a StockPaying a Discrete DividendJoao Amaro de Matos, Rui Dilao and Bruno FerreiraFaculdade de Economia, Universidade Nova de Lisboa, Rua Marques de Fronteira,20, 1099-038 Lisbon, PortugalNonlinear Dynamics Group, Instituto Superior Tecnico, Av. Rovisco Pais,1049-001 Lisbon, Portugalamatos@fe.unl.pt; rui@sd.ist.utl.pt; bruno.ferreira@mckinsey.comAbstractIn the context of a Black-Scholes economy and with a no-arbitrage argument,we derive arbitrarily accurate lower and upper bounds for the value of Europeanoptions on a stock paying a discrete dividend. Setting the option price errorbelow the smallest monetary unity, both bounds coincide, and we obtain theexact value of the option.1IntroductionIn the seminal paper of Black and Scholes (1973), the problem of valuing a Europeanoption was solved in closed form. Among other things, their result assumes that thestochastic process associated to the underlying asset is a geometric Brownian motion,not allowing for the payment of discrete dividends. Yet the majority of stocks onwhich options trade do pay dividends.Merton (1973) was the first to relax the no-dividend assumption, allowing for adeterministic dividend yield. In this case, he showed that European options can bepriced in the context of a Black-Scholes economy, with either a continuous dividendyield or a discrete dividend proportional to the stock

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