Arbitrage: One Period Binomial Call Option

How can one make money off a miss priced derivative. The ability to create options using stocks and bonds is an important theoretical piece t understanding options. It also proves the correct price and can be used to arbitrage miss priced options. In this video we analyze a call option. The same method can be used on put options as well.

One Period Binomial: Easy Method

One Period Binomial: Financial Engineering Method

[ahmedmak]

Thanks, Dimitri; these videos are great. Please do more stochastic calculus/financial derivatives examples (thinking of examples with stochastic partial differential equations). Would you be willing to do a video discussing risk neutral vs real-world probabilities and how they are applied in the real world?

On a side note, what do you think of platforms like Quantopian? Specifically, how are the learning materials they offer?

[julianherlein]

Hi Dimitri, how are you? Thanks for all this videos! The only thing that i don´t understand about that is how you get the stock values of head and tails in real life. Are these values the most probable to ocurr?. Why did you use 110 and 80 ? and not another number ( heads > tails ). Don't we have to calculate the payoff for the infinites positives values that the stock could go?

[ireneuszpyc]

Michael Hasenstab holds a PhD in economics from Australian National University, lives in San Mateo, California, and runs Templeton Global Income Fund, Inc., which is traded at N.Y.S.E.
on 11 February 2011 a single common share of the fund had been trading at $10.45;
this week, on 9 February 2018 a single share cost only $6.35 (a loss of 39.23% over 7 years);
how do you lose 39.23% over 7 years when you hold a PhD in economics, and run a big fund?