What is nonlinearity in option pricing model
What is nonlinearity in option pricing model?
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Nonlinearity in an option pricing model implies that the value of a portfolio of contracts is not essentially the same as the sum of its constituent parts values. An option will have a various value depending on what else is within the portfolio with this, and an exotic will have a different value depending on what this is statically hedged along with.
The market risk premium is the difference between the historical return on the stock market and the return on bonds. But how many years does “historical” imply? Shall we use the arithmetic mean or the geometric one?
Who published a book regarding option formula and risk neutrality?
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Explain new methodology of standard market practice.
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