Académique Documents
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Pawel Polak
Spring 2017
Plan
I Today is time 0.
I Fix time horizon T > 0 (tomorrow, next year, end of world. . . )
I Some securities that have well-defined value at time T :
I Zero coupon bond. Value BT = 1 (by definition).
I One unit of money market account. Value = 1 + interest.
I One share of a (liquid) stock. Value ST (from market).
I One CNY (in USD). Value from market.
I Note: value at time T not necessarily known today!
I Long means buying a security with the expectation that the
asset will rise in value. In math, we use a positive number to
represent a long position.
I Short means borrowing a security and selling it, with the
expectation that the asset will drop in value. In math, we use
a negative number to represent a short position.
Derivative securities
Replicating portfolios