19. Black-Scholes Formula, Risk-neutral Valuation 

I would pause at the slides to digest them before moving on.

I'm late, but most of these videos have the lecture notes and slides at the website in the description. It has the syllabus and even the book they are teaching from as well.

I doubt that. I've just started and the 2-horse example is unclear. For example, the slide does not say how much guy gets if the second horse wins, only how much guy loses if the second horse loses.

If horse A wins in that example for the 4 to 1 payout the bookie must pay 10,000 + 4(1,000)=$50,000 => bookie profits $10k because he had $60k in bets total horse B wins with the 4:1 payout he loses $2,500 because he has to pay the better with a $50k bet 50,000(1.25)=$62,500 so he loses $62,500-$60,000=$2,500 He kinda went through it fast but the logic is clear

​@nelsonmorrow5657 Im confused wouldn't it be...If A wins 4*10k+10k -50k = 0 and If B wins 50K/4 -10k =2500?

Hah)

Finally some kids brave enough to say that "the king is naked".

What are you talking about. He explained it perfectly. It's a simple formula to create a price based on market transactions to forever sell derivative products for no risk.

I thought he explained it fairly well bar a few details I need to rewatch and I'm not versed in this stuff. I think it helps to look at it from the p.o.v. of a broker needing to set prices for derivatives such that they (the broker) bears none of the risk of the underlying asset, rather than the p.o.v. of Joe Bloggs the punter looking to profit from a trade. In the base case, the broker makes their money from a fee so don't care how the the underlying asset performs; therefore this Black-Scholes analysis solves a big problem for them. The fees are just excluded from the calculations he shows for simplicity since they would add another small term in the equations to be manipulated.

It’s crazy to think how much this lecture would cost in tuition compared to a free RU-vid channel like inthemoneyadam. When a RU-vidr in his 20’s can break things down in a more organized and consumable manner than someone with a PHD charging inhuman amounts of money…

c + Ke^-rt = p + S mate

Call option is the insurance against the price going up, you want to buy the underlying at the cheaper price even if it moves way higher, Put option is insurance against the asset going down, you want to sell it to highest bidder, so that you don't loose money

Insurance with respect to Call options is only relevant for American options, since they have an opportunity cost assigned to the time you chose to exercise the option. It is generally suggested in case of a non-dividend paying stock to exercise the American Call option at expiry due to the time value of money. With American Put options, insurance is relevant because the optimal time to exercise the option is before the expiry date. The insurance is offered against price rise by call options and against the price falls by put options, but only for the American ones. This feature is of not of major importance when talking about European options.

+Samson Tsui Call option can be seen as insurance against price drop compares to actually long the stock. With call option your loss would be limited.

rene f are you serious? How?

@@jivillain bear in mind that Put + long stock = Call. So if you are already long the stock and you are looking for an insurance against price drop... you have to buy a put indeed. But if you want to invest on a stock with the protection, you can directly buy the call since its equivalent to stock+put.

And it does not CALL you, so no warning.

Good point. The only way to get the blue line below the pink line is to have a EUROPEAN put (can't exercise) and insanely high interest rates such that your option is worth discounted parity.

I couldn't find much about it on Google. Can you provide a link and/or brief summary?

Lol....

@Nick de windt😂😂😂😂😂😂😂

Math is more of a merit based honor system. Just in case your bias is from a culture that respects teachers automatically. His was a nice yet impractical exercise, delivered with a distracting accent. If Black-Scholes based on European option design was of much use. Everyone would be wealthy. Actually, this was a complicated exercise but aimed in the wrong direction for the problem that the title alludes to. One point that he omitted, was explaining the different versions that are in use by companies, of the Beta Greek.

if you agree with the continuous compounding equation B=Bo * e^(rt), then dB/dt = r* Bo*e^(rt) = rB. rearrange the equation gives you dB = rBdt

@@jianweng3463 thanks!

*this didn't age well with coronavirus impacting the economy and rendering "powers-that-be" powerless.*

Thanks for admitting you don't understand change of measure I guess?

This did not age well? Idk lol

Yifan Liu True, but he has world experience that is better than an academic teacher. Dr. Vasily Strela, Dissertation: Multiwavelets -- Theory and Applications, is a Research Affiliate in the MIT Department of Mathematics. He is also a Managing Director and the Global Head of Fixed Income Modeling at Morgan Stanley.

I miss Choonbum Lee

Fixed income modeling...now I understand why he sounded depressed after explaining the dollar invested at Cambridge savings bank is a dollar a year later, and didn't have to explain inflation to that crowd. Selling something you don't believe in, can be depressing. @@scottab140

lol no, not at all

Lmao he looks like Jason Segals dad acting like professor Mosby

probably the microphone

I found him interesting

Don't worry about it, the talk was aimed in the wrong direction and instead just delivered what you could read anywhere. Except in this case he drew out some math for us to see.