FIN 376: Binomial Option Pricing and Delta Hedging

Introduction to the binomial option pricing model, delta hedging, and risk-neutral valuation.

[wolfgangi]

Very intuitive explanation! Thank you! This is indeed a nobel prize worthy idea. The fact that using a risk free (100% hedged position) we can back out the PV using risk free rate as a proxy of the discount rate because they are equivalent. We completely bypass the need to use probability.

[mokichoki]

Dr. Matt you are simply the best. Thank you for simplifying the topic so logically and in the most comprehendible manner.

[karthikmurali]

Best explanation of binomial hedging and option pricing Ive ever seen. Thanks a lot!!

[andreavento]

Finally, thank you for the intuition, best explanation on youtube

[Frizataufik]

THANK YOU MUCH FOR THIS LECTUREE!!! IT HELPS ME A MY PROF UNI SUCKSS!! HE JUST WANT TO SHOW OFF HOW SMART HE IS!!

[peerasilpwiwattananon]

Thank you so much! Your lecture is easy to understand and help me make sense of complex option pricing formula & Black–Scholes model.

[aronhegedus]

really good video. Teacher is a perfect mix of friendly and explanatory

[jianxuan]

Would like to ask: in the vid, you said that we use bonds and stock to replicate the call options. But when you said borrow at time 0, are we referring to buying of bonds? - thast why it is negative
so at maturity(t=1), shouldnt it be a plus of 90? since we are getting back our maturity value
Thank you so much in advance

[thakkarr]

Excellent .. Made it easier for CFA 2 options pricing topic ..

[jackFatal]

Hi there i'm from Africa (Côte d'Ivoire), i took a course on pricing options but i didn't understand it well, thanks to your recap it's better now

[lucanthony]

Thanks for the video.
Why do we devide 90/105?

[utpalm]

@ Matt Brigida Thanks for posting. At 10:48, why does selling the call mean it's a negative 10 dollars. Should it not be positive $10? I am a little confused.

[zagreus]

Are we explicitly assuming that the market has no other securities available other than the bond, stock and call option when pricing this option?

[tosinbabasola]

Thanks you for the video; I will so glad if you can also make a video on option pricing using hermite polynomial.

[dodgingdurangos]

How do you adjust for different number of time periods (e.g., a few hours, a few days, a few weeks, a few months)?

[davide.lionetti]

Awesome video. Wish my teacher was like that. By the way, why do we assume that the delta stays constant for whatever change in price?

[Lukas-cmb]

what will happen with your long shares if the stock sharply dips

[zagreus]

Sorry I have loads of questions and I will try and post them as I go through the video:

1) Why did you just calculate the PV of $90 when deciding the amount to be borrowed? What is the rationale behind this?
2) Why is the payoff at time 1 = $120 - $90 = $30 ?

[caverac]

This is great! Thanks so much for uploading this. I have a question, in the second model when you replicate B, why would anyone want to sell a call? My point is that if I sell a call, in the up-state I loose 10, and in the down-state I gain nothing. So, there's no benefit in selling the call. Am I missing something?

[LeilaRmaths]

At 7:29, could you please someone explain why the portfolio at time 0 equivalent 3 Calls? Thank you