Contingent Claims: Option Valuation and Risk Management

Free CFA Level II lesson in Derivatives. 22 min read, ~3,274 words.

Put-call parity: Call + PV(K) = Put + Stock. Discount the strike, and remember it holds as a strict equality only for European options. BSM prices the cost of a continuously hedged replicating portfolio. sigma is the only input you cannot observe. Compute d2 = d1 - sigma x sqrt(T)...