The Impact on Option Pricing of Specification Error in the Underlying Stock Price Returns (Classic Reprint) - Hardcover

Robert C. Merton

9780331884531: The Impact on Option Pricing of Specification Error in the Underlying Stock Price Returns (Classic Reprint)

Hardcover

ISBN 10: 0331884534 ISBN 13: 9780331884531

Publisher: Forgotten Books, 2018

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Excerpt from The Impact on Option Pricing of Specification Error in the Underlying Stock Price Returns

At the heart of the derivation of the Black - Scholes option pricing formula is the arbitrage technique by which investors can follow a dynamic p�rtfolio strategy using the stock and riskless borrowing t0'exactly repro duce the return structure of an option. By following this strategy in com bination with a short position in an option, the investor can eliminate all risk from the total position, and hence to avoid arbitrage.opportunities.

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