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COUNTING MONEY
AMBER HABIB
MATHEMATICAL SCIENCES FOUNDATION
NEW DELHI
Pure Imagination
Practical Problems
Accounting → Arithmetic
Measuring area to estimate tax revenue → Geometry
Gambling → Probability
Mechanics → Calculus
Is this a profit?
$100 → $120
Rs 50/$ → Rs 40/$
Rs 5000 → Rs 4800
What is Profit?
7
A Pe nr
Risk-free Rate of Interest
12
No Arbitrage Principle ⇒
A = PerT
Futures
13
SU
Suppose the price starts at S and
over time T can go up by factor U
or down by factor D.
S
Then the option also has two
SD possible final values.
CU = (SU-X)+
x, x 0
x
C 0, x 0
CD = (SD-X)+
t=0 T=T
Binomial Model
25
S(U D)
h
CU CD
Binomial Model
26
erT D
q
UD
Binomial Options Pricing Model
27
CUUU=(SU3-X)+
CUU
CUUD =(SU2D-X)+
CU
CUD
C CUDD
CD
CDD
CDDD
BOPM
29
e D rT/n
where q
UD
The proof is by mathematical induction.
Features of BOPM
30
k 0
n
Ck qk (1 q)nk SUkDnk S(qU (1 q)D)n
SerT
Under q, the expected value grows at the risk free
rate. We call such a probability risk neutral.
BOPM in Action
32
holder)
American Options (Holder can exercise
contract before T)
Barrier Options (Contract expires if asset price
Rabindranath Chatterjee
Samarendra Sinha
MSc Maths - IIT Kanpur (1989)
PhD Maths – University of Minnesota (1995) –
algebraic geometry
Post-Doc at IAS, Princeton (1995-96)