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outrun
Posts: 3718
Joined: April 29th, 2016, 1:40 pm

Re: to Black Scholes pricing

October 12th, 2017, 9:21 pm

In the binomial model you don't care about mu: if the stock goes up or down ..your P&L of the hedged call is in both cases zero.

This means that the probability of going up -and hence the value of mu- does not matter if you hedge!
 
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list1
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Joined: July 22nd, 2015, 2:12 pm

Re: to Black Scholes pricing

October 12th, 2017, 10:38 pm

outrun wrote:
In the binomial model you don't care about mu: if the stock goes up or down ..your P&L of the hedged call is in both cases zero.

This means that the probability of going up -and hence the value of mu- does not matter if you hedge!

outrun, You right. In BS scheme distributions S up-down are given with the help of explicit parameters (mu, sigma). In binomial scheme distributions up-down are  given directly and all constructions are given with the help of [$]S_{down} ,p_{down} ; S_{up} , p_{up} [$] . Though I think one can try to present value mu and express hedging ration in terms of mu. Though no one need that.  
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