By P. Glabadanidis
Absence of Arbitrage Valuation provides a unified asset pricing procedure via absence of arbitrage and applies this framework to such disparate fields as mounted source of revenue safeguard pricing, foreign currency echange spots, and ahead charges.
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Extra info for Absence of Arbitrage Valuation: A Unified Framework for Pricing Assets and Securities
This leads us to the following system of linear equations we need to solve: 200 × NS + 100 × NB = 100, 50 × NS + 100 × NB = 0. The solution is given by NS = 23 and NB = − 13 . In other words, in order to replicate three options, we need to buy two shares of stock Financial Options 49 and sell one bond. Note that the replicating portfolio involves leverage and consists of buying the risky underlying stock partially funding the purchase with risk-free borrowing. This is the general result for all plain vanilla call options.
5 plots the forecasted growth rate of dividend per share over time in a three-stage dividend discount model where each stage has its own distinct growth rate. 4 Future forecasts of the expected growth rate in the E model. 5 Future forecasts of the expected growth rate in a three-stage DCF model. Discounted Cash Flow Valuation 21 where DPS0 (1 + g1 )n1 (1 + g2 ) 1 − VEn1 = VEn1 +n2 = 1 + g2 1 + re,2 re,2 − g2 n2 , DPS0 (1 + g1 )n1 (1 + g2 )n2 (1 + g3 ) re,3 − g3 are the present value at t = 0 of the third-stage dividends per share and the present value at t = 0 of the second-stage dividends per share, respectively.
Let us ﬁrst consider the case of call options. It is clear from the terminal payoff that when the stock price is worthless at the maturity of the option, the option will be worth nothing as well. At the opposite extreme, when the stock price becomes extremely expensive the option is worth approximately the stock price minus the present value of the strike price. The option value prior to maturity always exceeds the terminal payoff though sometimes the time value can be quite small when the option is out of the money.
Absence of Arbitrage Valuation: A Unified Framework for Pricing Assets and Securities by P. Glabadanidis