Black-Scholes Formula and Delta Hedging

Free SOA Exam FAM (Fundamentals of Actuarial Mathematics) lesson in Option Pricing Fundamentals. 12 min read, ~1,863 words.

Call:. Put:.,. Call delta =. Put delta =. Delta hedge a short call: buy shares per call, then rebalance as moves. = risk-neutral probability the call finishes ITM. Higher volatility raises both call and put prices. The binomial model converges to Black-Scholes as the number of periods increases.