PART 5 DYNAMIC PROGRAMMING
|
|
- Cameron Porter
- 7 years ago
- Views:
Transcription
1 PART 5 DYNAMIC PROGRAMMING 13
2 Shortest paths in directed graphs Directed graph Tuple G= (V,A), where V is finite set of nodes and A V V is set of arcs (also called edges); arc from u to v is denoted by uv c : A R weights on arcs Path is sequence P= v,v 1,...,v k of nodes such that v i 1 v i A for i=1,...,k. Length of path c(p)= k i=1 c(v i 1v i ) Path v,v 1,...,v k with v = v k is called cycle Shortest path problem Let s V. Determine for each v V a shortest path from s to v. 131
3 Bellman s Equations Suppose G does not contain cycle of negative length Let l(v) be length of shortest path from s to v (possibly ) Clearly l(s) = (no neg. cycles!) For uv A one has l(v) l(u)+c(uv) If v s, there must be a node u on shortest path from s to v immediately preceding v. For this u one has l(v)=l(u)+c(uv) (principle of optimality) The shortest path distances l(v) satisfy Bellman s equations x s =, x v = min{x u + c(uv): uv A}, v V. 132
4 Sufficiency Theorem: If G does not contain cycles of length and if one has a path from s to each other node v, then there is unique solution to Bellman s equations, where x u = l(u) for each u V. 133
5 Proof Let x be solution to Bellman s equations Let v V, v s. There exists uv A with x v = x u + c(uv). Likewise, there exists w V with x u = x w + c(wu). If, repeating, this process, we come back to v again, we have found a cycle of length which is excluded Consequently, we arrive at s and we have constructed a path P= (s=v,v 1,...,v k = v) with x v = c(p)+x s = c(p). This shows x v l(v). Suppose x l. Then there exists node v with x v > l(v) such that the node u preceding v on shortest path from s to v has x u = l(u). Bellman s equations imply x v x u + c(uv)=l(u)+c(uv)=l(v) 134
6 Acyclic Graphs G = (V, A) is acyclic if G does not contain cycles In this case, G has an ordering < of nodes, such that uv A implies u<v (depth first search) Assume nodes are set {1,...,n}. Bellman s equations acyclic graphs x 1 = x j = min k<j (x k + c kj ) j=2,3,...,n. Easily solved by substitution x 2 is determined from x 1, x 3 determined from x 1 and x 2 etc. Running time: O( A + V ) 135
7 Bellman-Ford algorithm Bellman-Ford algorithm x j v length of shortest path from s to v using at most j arcs Initialization: x 1 s =, x1 v = { c(sv) for i=2,...,n for v V Running time x i v = min{xi 1 v Iterations outer loop: V if sv A otherwise.,min uv A {xu i 1+ c(uv)}} Each arc is considered exactly once in inner loop: O( A ) Complexity: O( V A ). 136
8 Negative cycles If network does not contain negative cycles and v is reachable from s, then a shortest path uses at most n 1 arcs. Bellman-Ford is correct if no negative cycles are present. Exercise Design a polynomial-time algorithm which detects whether G = (V, A) together with arc-weights c has a negative cycle. 137
9 Dynamic programming A capital budgeting problem 4 million to be invested in projects in three different regions At most one project can be run in each region Region 1 Region 2 Region 3 Project cost/profit cost/profit cost/profit 1 / / / 2 1/2 1/3 1/2 3 2/4 3/9 2/5 4 4/1 - - Enumeration possibilities 138
10 Integer program x ij = 1 if project i is run in region j max ij p ij x ij i x ij 1, j= 1,...,3 ij c ij x ij 4 x ij {,1}. 139
11 Dynamic program States (i, j) represents optimal choice for first i {, 1, 2, 3} regions having still j {, 1, 2, 3, 4} mio. left to invest. Construct graph with nodes being states and arcs from stages (i,j) to (i+ 1,j ) having cost p if the investment of j j reflects an implementation of a project of cost j j and profit p in region i+ 1 Longest path in this directed acyclic graph is optimal strategy Number of states: 4 5 If we had x N regions with at least two possible projects per region and an amount of y N to invest, where each project would have integral costs, one would have (x + 1) (y + 1) states, whereas enumeration would require at least 2 x decisions to be compared. 14
12 Example cont. (,4) (1,4) (1,3) (1,2) (1,1) (1,) (2,4) (2,3) (2,2) (2,1) (2,) (3,4) (3,3) (3,2) (3,1) (3,)
13 Forward and backward recursion Forward recursion: Label each state which is reachable from starting state with the longest path distance from starting state using profits as edge costs. Process starts from starting node Backward recursion: Label each state with largest profit that can be collected from this state. 142
14 The Knapsack Problem Knapsack n items of weight w i N and profit p i N, i=1,...,n Knapsack of capacity K N Task: Compute subset of items which still fit into knapsack and maximizes the profit Integer Program max n i=1 p ix i n i=1 w ix i K x i {,1}. 143
15 Dynamic program for Knapsack W i (p) least possible weight that has to be accumulated in order to have total profit p using only items from {1,...,i} W i+1 (p)=min{w i (p),w i (p p i+1 )+w i+1 } States: {(i,p): i {1,...,n}, p {,...,n p max }}, where p max = max{p i : i=1,...,n}. There is an edge from (i,p) to (i+ 1,p) of weight and there is an edge from (i,p) to (i+ 1,p+p i+1 ) of weight w i+1. Compute shortest path distances from (,) to all nodes in directed graph Number of nodes: p max n 2 Number of arcs: 2 p max n 2 Theorem The knapsack problem can be solved in time O(n 2 p max ). 144
16 Alternative dynamic program P i (w): Maximum profit which can be accumulated choosing items out of {1,..., i} having total weight w. P i+1 (w)=max{p i (w),p i (w w i+1 )+p i+1 } States: {(i,w): i {1,...,n}, w {,...,K }} There is an edge from (i,w) to (i+ 1,w) of weight and an edge from (i,w) to (i+ 1,w+ w i+1 ) of weight p i+1. Number of states: n K Number of arcs: 2 n K Find longest paths from (,) to other states Running time: O(n K) 145
17 Approximation algorithm ε-approximation algorithm Let ε> be a number The algorithm A computes an ε-approximation to the knapsack problem, if it computes a feasible solution x ε with p T x ε (1 ε)p T x OPT, where x OPT is an optimal solution of the Knapsack problem A is fully polynomial time approximation scheme if the running time of A is polynomial in n and 1/ε. 146
18 Designing A Set last t bits of each p i to obtaining profits p i Let x {,1} n be feasible knapsack solution. Clearly p T x p T x p T x n 2 t Let x 1,x 2 be opt. sol w.r.t. p and p respectively One has p T x 1 p T x 2 p T x 2 p T x 1 p T x 1 n 2 t from which we conclude p T x 1 p T x 2 n 2 t We want (p T x 1 p T x 2 )/p T x 1 ε We have (p T x 1 p T x 2 )/p T x 1 n 2 t /p max If n/p max > ε solve problem with exact algorithm which takes time O(n 2 p max )=O(n 3 /ε). Else find t with ε/2< n 2 t /p max ε Apply algorithm to instance defined by p=p/2 t. p max 2 t p max < 2 n 2t ε 2 t = 2 n/ε. Running time: O(n 2 p max )=O(n 3 /ε) 147
19 Fully polynomial time approximation scheme for Knapsack Theorem There exists an algorithm which, given a knapsack instance and ε> computes a feasible solution x with OPT(1 ε) p T x Where OPT denotes the value of an optimal solution. The running time of the algorithm is O(n 3 /ε). 148
20 PART 5.1 OPTION PRICING 149
21 American call options Gives the holder right to purchase underlying security for prescribed amount strike price Valid until certain expiration date Pricing derivative security S current price of underlying security Two possible outcomes up and down at time 1: S u 1 = S u S d 1 = S d How to price the derivative security? 15
22 Replication Consider portfolio of shares of the underlying and B cash Up-state: S u+b R, (R is risk-less interest rate) Down-state: S d+ B R For what values of and B will portfolio have same payoff C1 u and C1 d of derivate? S u+b R = C1 u S d+ B R = C1 d One obtains = Cu 1 Cd 1 S (u d) B= ucd 1 dcu 1 R(u d) 151
23 Since portfolio is worth S +B today, this should also be price for derivate security C = Cu 1 Cd 1 u d + ucd 1 dcu 1 R(u d) = 1 [ R d R u d Cu 1 + u R ] u d Cd 1 Risk-neutral probabilities p u = R d u d, p d = u R u d Remark There is arbitrage opportunity if u>r>d is not satisfied. Consequently p u,p d > and since p u + p d = 1 one can interpret p u and p d as probabilities. 152
24 n time steps Basic period length (day or week... ) Price of asset in period being S there is the up event (price us) with probability p and down event (price ds) with probability 1 p Starting from price S in period, in period k it is u j d k j S if there are j up- and k j down moves. Probability is ( k j) p j (1 p) k j (binomial distribution). 153
25 n time steps Determining u, d and p S k : Price in periods k=,...,n Assume to know : Mean value µ and volatility σ of ln(s n /S ) Let =1/n be length between two consecutive periods Mean and volatility of ln(s 1 /S ) are µ and σ respectively Direct computation yields µ =p lnu+(1 p)ln d and σ 2 =p (1 p)(ln u lnd) 2. Set d= 1/u then equations simplify µ = (2p 1)ln u σ 2 = 4p(1 p)(ln u) 2 Squaring first and adding it to second equation yields (ln u) 2 = σ 2 +(µ )
26 Determining u, d and p cont. u = e σ 2 +(µ ) 2 d = e σ 2 +(µ ) 2 ( ) p = (σ 2 /µ 2 ) For small this is approximately u = e σ d = e σ p = 1 ( 1+ µ ) 2 σ 155
27 Example 52 periods S known and random price S 52 with mean and standard deviation of ln(s 52 /S ) being 1% and 3% respectively. Since =1/52 is small one has u=e.3/ 52 = 1.425, d=.9592 and p=1/2+( ) 156
28 Dynamic program to determine value of option Suppose strike price is c Work backwards from time N to time Nodes at time N are terminal nodes Option value v(j,n) of terminal nodes at height j is max{u j d N j S c,} Compute v(k,j) from v(k+ 1,j) and v(k+ 1,j+ 1) using formula with risk-neutral probabilities p u = R d u d, p d = u R u d : { } 1 v(k,j)= max R (p uv(k+ 1,j+ 1)+p d v(k+ 1,j)),u j d k j S c Output v(, ) 157
29 Example Stock with Volatility of logarithm σ=.2 Current price is 62 What is price of American call option with expiration date in 5 months from now? Strike price c is 6 Rate of interest is 1% compounded monthly Compute values =1/12, u=1.5943, d=.9439, R=1+.1/12= p u =.5577 Fill table entries at the end of period. Example (upper right): S u 5 c=
30 Example cont
Option Valuation. Chapter 21
Option Valuation Chapter 21 Intrinsic and Time Value intrinsic value of in-the-money options = the payoff that could be obtained from the immediate exercise of the option for a call option: stock price
More informationConsider a European call option maturing at time T
Lecture 10: Multi-period Model Options Black-Scholes-Merton model Prof. Markus K. Brunnermeier 1 Binomial Option Pricing Consider a European call option maturing at time T with ihstrike K: C T =max(s T
More informationScheduling Single Machine Scheduling. Tim Nieberg
Scheduling Single Machine Scheduling Tim Nieberg Single machine models Observation: for non-preemptive problems and regular objectives, a sequence in which the jobs are processed is sufficient to describe
More informationScheduling Shop Scheduling. Tim Nieberg
Scheduling Shop Scheduling Tim Nieberg Shop models: General Introduction Remark: Consider non preemptive problems with regular objectives Notation Shop Problems: m machines, n jobs 1,..., n operations
More informationWhy? A central concept in Computer Science. Algorithms are ubiquitous.
Analysis of Algorithms: A Brief Introduction Why? A central concept in Computer Science. Algorithms are ubiquitous. Using the Internet (sending email, transferring files, use of search engines, online
More informationChapter 21: Options and Corporate Finance
Chapter 21: Options and Corporate Finance 21.1 a. An option is a contract which gives its owner the right to buy or sell an underlying asset at a fixed price on or before a given date. b. Exercise is the
More informationReinforcement Learning
Reinforcement Learning LU 2 - Markov Decision Problems and Dynamic Programming Dr. Martin Lauer AG Maschinelles Lernen und Natürlichsprachliche Systeme Albert-Ludwigs-Universität Freiburg martin.lauer@kit.edu
More informationDynamic programming. Doctoral course Optimization on graphs - Lecture 4.1. Giovanni Righini. January 17 th, 2013
Dynamic programming Doctoral course Optimization on graphs - Lecture.1 Giovanni Righini January 1 th, 201 Implicit enumeration Combinatorial optimization problems are in general NP-hard and we usually
More information10 Binomial Trees. 10.1 One-step model. 1. Model structure. ECG590I Asset Pricing. Lecture 10: Binomial Trees 1
ECG590I Asset Pricing. Lecture 10: Binomial Trees 1 10 Binomial Trees 10.1 One-step model 1. Model structure ECG590I Asset Pricing. Lecture 10: Binomial Trees 2 There is only one time interval (t 0, t
More informationFAIR VALUATION OF THE SURRENDER OPTION EMBEDDED IN A GUARANTEED LIFE INSURANCE PARTICIPATING POLICY. Anna Rita Bacinello
FAIR VALUATION OF THE SURRENDER OPTION EMBEDDED IN A GUARANTEED LIFE INSURANCE PARTICIPATING POLICY Anna Rita Bacinello Dipartimento di Matematica Applicata alle Scienze Economiche, Statistiche ed Attuariali
More information5 INTEGER LINEAR PROGRAMMING (ILP) E. Amaldi Fondamenti di R.O. Politecnico di Milano 1
5 INTEGER LINEAR PROGRAMMING (ILP) E. Amaldi Fondamenti di R.O. Politecnico di Milano 1 General Integer Linear Program: (ILP) min c T x Ax b x 0 integer Assumption: A, b integer The integrality condition
More informationThe Goldberg Rao Algorithm for the Maximum Flow Problem
The Goldberg Rao Algorithm for the Maximum Flow Problem COS 528 class notes October 18, 2006 Scribe: Dávid Papp Main idea: use of the blocking flow paradigm to achieve essentially O(min{m 2/3, n 1/2 }
More informationBuy a number of shares,, and invest B in bonds. Outlay for portfolio today is S + B. Tree shows possible values one period later.
Replicating portfolios Buy a number of shares,, and invest B in bonds. Outlay for portfolio today is S + B. Tree shows possible values one period later. S + B p 1 p us + e r B ds + e r B Choose, B so that
More informationReinforcement Learning
Reinforcement Learning LU 2 - Markov Decision Problems and Dynamic Programming Dr. Joschka Bödecker AG Maschinelles Lernen und Natürlichsprachliche Systeme Albert-Ludwigs-Universität Freiburg jboedeck@informatik.uni-freiburg.de
More informationBinomial lattice model for stock prices
Copyright c 2007 by Karl Sigman Binomial lattice model for stock prices Here we model the price of a stock in discrete time by a Markov chain of the recursive form S n+ S n Y n+, n 0, where the {Y i }
More informationWarshall s Algorithm: Transitive Closure
CS 0 Theory of Algorithms / CS 68 Algorithms in Bioinformaticsi Dynamic Programming Part II. Warshall s Algorithm: Transitive Closure Computes the transitive closure of a relation (Alternatively: all paths
More informationGRAPH THEORY LECTURE 4: TREES
GRAPH THEORY LECTURE 4: TREES Abstract. 3.1 presents some standard characterizations and properties of trees. 3.2 presents several different types of trees. 3.7 develops a counting method based on a bijection
More informationInstitutional Finance 08: Dynamic Arbitrage to Replicate Non-linear Payoffs. Binomial Option Pricing: Basics (Chapter 10 of McDonald)
Copyright 2003 Pearson Education, Inc. Slide 08-1 Institutional Finance 08: Dynamic Arbitrage to Replicate Non-linear Payoffs Binomial Option Pricing: Basics (Chapter 10 of McDonald) Originally prepared
More informationCS 522 Computational Tools and Methods in Finance Robert Jarrow Lecture 1: Equity Options
CS 5 Computational Tools and Methods in Finance Robert Jarrow Lecture 1: Equity Options 1. Definitions Equity. The common stock of a corporation. Traded on organized exchanges (NYSE, AMEX, NASDAQ). A common
More informationChapter 11. 11.1 Load Balancing. Approximation Algorithms. Load Balancing. Load Balancing on 2 Machines. Load Balancing: Greedy Scheduling
Approximation Algorithms Chapter Approximation Algorithms Q. Suppose I need to solve an NP-hard problem. What should I do? A. Theory says you're unlikely to find a poly-time algorithm. Must sacrifice one
More information! Solve problem to optimality. ! Solve problem in poly-time. ! Solve arbitrary instances of the problem. !-approximation algorithm.
Approximation Algorithms Chapter Approximation Algorithms Q Suppose I need to solve an NP-hard problem What should I do? A Theory says you're unlikely to find a poly-time algorithm Must sacrifice one of
More informationSolutions to Homework 6
Solutions to Homework 6 Debasish Das EECS Department, Northwestern University ddas@northwestern.edu 1 Problem 5.24 We want to find light spanning trees with certain special properties. Given is one example
More informationThe Black-Scholes Formula
FIN-40008 FINANCIAL INSTRUMENTS SPRING 2008 The Black-Scholes Formula These notes examine the Black-Scholes formula for European options. The Black-Scholes formula are complex as they are based on the
More informationMinimum cost maximum flow, Minimum cost circulation, Cost/Capacity scaling
6.854 Advanced Algorithms Lecture 16: 10/11/2006 Lecturer: David Karger Scribe: Kermin Fleming and Chris Crutchfield, based on notes by Wendy Chu and Tudor Leu Minimum cost maximum flow, Minimum cost circulation,
More informationApproximation Algorithms
Approximation Algorithms or: How I Learned to Stop Worrying and Deal with NP-Completeness Ong Jit Sheng, Jonathan (A0073924B) March, 2012 Overview Key Results (I) General techniques: Greedy algorithms
More informationAmerican and European. Put Option
American and European Put Option Analytical Finance I Kinda Sumlaji 1 Table of Contents: 1. Introduction... 3 2. Option Style... 4 3. Put Option 4 3.1 Definition 4 3.2 Payoff at Maturity... 4 3.3 Example
More informationAmerican Options. An Undergraduate Introduction to Financial Mathematics. J. Robert Buchanan. J. Robert Buchanan American Options
American Options An Undergraduate Introduction to Financial Mathematics J. Robert Buchanan 2010 Early Exercise Since American style options give the holder the same rights as European style options plus
More information! Solve problem to optimality. ! Solve problem in poly-time. ! Solve arbitrary instances of the problem. #-approximation algorithm.
Approximation Algorithms 11 Approximation Algorithms Q Suppose I need to solve an NP-hard problem What should I do? A Theory says you're unlikely to find a poly-time algorithm Must sacrifice one of three
More informationComplexity Theory. IE 661: Scheduling Theory Fall 2003 Satyaki Ghosh Dastidar
Complexity Theory IE 661: Scheduling Theory Fall 2003 Satyaki Ghosh Dastidar Outline Goals Computation of Problems Concepts and Definitions Complexity Classes and Problems Polynomial Time Reductions Examples
More information7: The CRR Market Model
Ben Goldys and Marek Rutkowski School of Mathematics and Statistics University of Sydney MATH3075/3975 Financial Mathematics Semester 2, 2015 Outline We will examine the following issues: 1 The Cox-Ross-Rubinstein
More informationn(n + 1) 2 1 + 2 + + n = 1 r (iii) infinite geometric series: if r < 1 then 1 + 2r + 3r 2 1 e x = 1 + x + x2 3! + for x < 1 ln(1 + x) = x x2 2 + x3 3
ACTS 4308 FORMULA SUMMARY Section 1: Calculus review and effective rates of interest and discount 1 Some useful finite and infinite series: (i) sum of the first n positive integers: (ii) finite geometric
More information6.231 Dynamic Programming and Stochastic Control Fall 2008
MIT OpenCourseWare http://ocw.mit.edu 6.231 Dynamic Programming and Stochastic Control Fall 2008 For information about citing these materials or our Terms of Use, visit: http://ocw.mit.edu/terms. 6.231
More informationDiscrete Optimization
Discrete Optimization [Chen, Batson, Dang: Applied integer Programming] Chapter 3 and 4.1-4.3 by Johan Högdahl and Victoria Svedberg Seminar 2, 2015-03-31 Todays presentation Chapter 3 Transforms using
More informationProblem Set 7 Solutions
8 8 Introduction to Algorithms May 7, 2004 Massachusetts Institute of Technology 6.046J/18.410J Professors Erik Demaine and Shafi Goldwasser Handout 25 Problem Set 7 Solutions This problem set is due in
More informationBicolored Shortest Paths in Graphs with Applications to Network Overlay Design
Bicolored Shortest Paths in Graphs with Applications to Network Overlay Design Hongsik Choi and Hyeong-Ah Choi Department of Electrical Engineering and Computer Science George Washington University Washington,
More informationSingle machine parallel batch scheduling with unbounded capacity
Workshop on Combinatorics and Graph Theory 21th, April, 2006 Nankai University Single machine parallel batch scheduling with unbounded capacity Yuan Jinjiang Department of mathematics, Zhengzhou University
More informationMonte Carlo Methods in Finance
Author: Yiyang Yang Advisor: Pr. Xiaolin Li, Pr. Zari Rachev Department of Applied Mathematics and Statistics State University of New York at Stony Brook October 2, 2012 Outline Introduction 1 Introduction
More information9.2 Summation Notation
9. Summation Notation 66 9. Summation Notation In the previous section, we introduced sequences and now we shall present notation and theorems concerning the sum of terms of a sequence. We begin with a
More informationComputer Algorithms. NP-Complete Problems. CISC 4080 Yanjun Li
Computer Algorithms NP-Complete Problems NP-completeness The quest for efficient algorithms is about finding clever ways to bypass the process of exhaustive search, using clues from the input in order
More informationCOUNTING INDEPENDENT SETS IN SOME CLASSES OF (ALMOST) REGULAR GRAPHS
COUNTING INDEPENDENT SETS IN SOME CLASSES OF (ALMOST) REGULAR GRAPHS Alexander Burstein Department of Mathematics Howard University Washington, DC 259, USA aburstein@howard.edu Sergey Kitaev Mathematics
More informationChapter 1: Financial Markets and Financial Derivatives
Chapter 1: Financial Markets and Financial Derivatives 1.1 Financial Markets Financial markets are markets for financial instruments, in which buyers and sellers find each other and create or exchange
More informationOptions: Valuation and (No) Arbitrage
Prof. Alex Shapiro Lecture Notes 15 Options: Valuation and (No) Arbitrage I. Readings and Suggested Practice Problems II. Introduction: Objectives and Notation III. No Arbitrage Pricing Bound IV. The Binomial
More informationNumerical Methods for Option Pricing
Chapter 9 Numerical Methods for Option Pricing Equation (8.26) provides a way to evaluate option prices. For some simple options, such as the European call and put options, one can integrate (8.26) directly
More informationCall and Put. Options. American and European Options. Option Terminology. Payoffs of European Options. Different Types of Options
Call and Put Options A call option gives its holder the right to purchase an asset for a specified price, called the strike price, on or before some specified expiration date. A put option gives its holder
More informationONLINE DEGREE-BOUNDED STEINER NETWORK DESIGN. Sina Dehghani Saeed Seddighin Ali Shafahi Fall 2015
ONLINE DEGREE-BOUNDED STEINER NETWORK DESIGN Sina Dehghani Saeed Seddighin Ali Shafahi Fall 2015 ONLINE STEINER FOREST PROBLEM An initially given graph G. s 1 s 2 A sequence of demands (s i, t i ) arriving
More informationFINANCIAL OPTION ANALYSIS HANDOUTS
FINANCIAL OPTION ANALYSIS HANDOUTS 1 2 FAIR PRICING There is a market for an object called S. The prevailing price today is S 0 = 100. At this price the object S can be bought or sold by anyone for any
More informationOption Values. Determinants of Call Option Values. CHAPTER 16 Option Valuation. Figure 16.1 Call Option Value Before Expiration
CHAPTER 16 Option Valuation 16.1 OPTION VALUATION: INTRODUCTION Option Values Intrinsic value - profit that could be made if the option was immediately exercised Call: stock price - exercise price Put:
More informationSingle machine models: Maximum Lateness -12- Approximation ratio for EDD for problem 1 r j,d j < 0 L max. structure of a schedule Q...
Lecture 4 Scheduling 1 Single machine models: Maximum Lateness -12- Approximation ratio for EDD for problem 1 r j,d j < 0 L max structure of a schedule 0 Q 1100 11 00 11 000 111 0 0 1 1 00 11 00 11 00
More informationLecture 3: Put Options and Distribution-Free Results
OPTIONS and FUTURES Lecture 3: Put Options and Distribution-Free Results Philip H. Dybvig Washington University in Saint Louis put options binomial valuation what are distribution-free results? option
More informationHull, Chapter 11 + Sections 17.1 and 17.2 Additional reference: John Cox and Mark Rubinstein, Options Markets, Chapter 5
Binomial Moel Hull, Chapter 11 + ections 17.1 an 17.2 Aitional reference: John Cox an Mark Rubinstein, Options Markets, Chapter 5 1. One-Perio Binomial Moel Creating synthetic options (replicating options)
More informationLecture 6: Option Pricing Using a One-step Binomial Tree. Friday, September 14, 12
Lecture 6: Option Pricing Using a One-step Binomial Tree An over-simplified model with surprisingly general extensions a single time step from 0 to T two types of traded securities: stock S and a bond
More information3 Introduction to Assessing Risk
3 Introduction to Assessing Risk Important Question. How do we assess the risk an investor faces when choosing among assets? In this discussion we examine how an investor would assess the risk associated
More informationHow To Price A Call Option
Now by Itô s formula But Mu f and u g in Ū. Hence τ θ u(x) =E( Mu(X) ds + u(x(τ θ))) 0 τ θ u(x) E( f(x) ds + g(x(τ θ))) = J x (θ). 0 But since u(x) =J x (θ ), we consequently have u(x) =J x (θ ) = min
More informationEC3070 FINANCIAL DERIVATIVES
BINOMIAL OPTION PRICING MODEL A One-Step Binomial Model The Binomial Option Pricing Model is a simple device that is used for determining the price c τ 0 that should be attributed initially to a call option
More informationMathematical Finance
Mathematical Finance Option Pricing under the Risk-Neutral Measure Cory Barnes Department of Mathematics University of Washington June 11, 2013 Outline 1 Probability Background 2 Black Scholes for European
More informationOne Period Binomial Model
FIN-40008 FINANCIAL INSTRUMENTS SPRING 2008 One Period Binomial Model These notes consider the one period binomial model to exactly price an option. We will consider three different methods of pricing
More informationOptimal Index Codes for a Class of Multicast Networks with Receiver Side Information
Optimal Index Codes for a Class of Multicast Networks with Receiver Side Information Lawrence Ong School of Electrical Engineering and Computer Science, The University of Newcastle, Australia Email: lawrence.ong@cantab.net
More information2. Exercising the option - buying or selling asset by using option. 3. Strike (or exercise) price - price at which asset may be bought or sold
Chapter 21 : Options-1 CHAPTER 21. OPTIONS Contents I. INTRODUCTION BASIC TERMS II. VALUATION OF OPTIONS A. Minimum Values of Options B. Maximum Values of Options C. Determinants of Call Value D. Black-Scholes
More informationLecture 1: Course overview, circuits, and formulas
Lecture 1: Course overview, circuits, and formulas Topics in Complexity Theory and Pseudorandomness (Spring 2013) Rutgers University Swastik Kopparty Scribes: John Kim, Ben Lund 1 Course Information Swastik
More information6.852: Distributed Algorithms Fall, 2009. Class 2
.8: Distributed Algorithms Fall, 009 Class Today s plan Leader election in a synchronous ring: Lower bound for comparison-based algorithms. Basic computation in general synchronous networks: Leader election
More informationHedging. An Undergraduate Introduction to Financial Mathematics. J. Robert Buchanan. J. Robert Buchanan Hedging
Hedging An Undergraduate Introduction to Financial Mathematics J. Robert Buchanan 2010 Introduction Definition Hedging is the practice of making a portfolio of investments less sensitive to changes in
More informationLecture 11. Sergei Fedotov. 20912 - Introduction to Financial Mathematics. Sergei Fedotov (University of Manchester) 20912 2010 1 / 7
Lecture 11 Sergei Fedotov 20912 - Introduction to Financial Mathematics Sergei Fedotov (University of Manchester) 20912 2010 1 / 7 Lecture 11 1 American Put Option Pricing on Binomial Tree 2 Replicating
More informationLecture 9. Sergei Fedotov. 20912 - Introduction to Financial Mathematics. Sergei Fedotov (University of Manchester) 20912 2010 1 / 8
Lecture 9 Sergei Fedotov 20912 - Introduction to Financial Mathematics Sergei Fedotov (University of Manchester) 20912 2010 1 / 8 Lecture 9 1 Risk-Neutral Valuation 2 Risk-Neutral World 3 Two-Steps Binomial
More informationLecture 15 An Arithmetic Circuit Lowerbound and Flows in Graphs
CSE599s: Extremal Combinatorics November 21, 2011 Lecture 15 An Arithmetic Circuit Lowerbound and Flows in Graphs Lecturer: Anup Rao 1 An Arithmetic Circuit Lower Bound An arithmetic circuit is just like
More informationMulti-layer Structure of Data Center Based on Steiner Triple System
Journal of Computational Information Systems 9: 11 (2013) 4371 4378 Available at http://www.jofcis.com Multi-layer Structure of Data Center Based on Steiner Triple System Jianfei ZHANG 1, Zhiyi FANG 1,
More informationForward Price. The payoff of a forward contract at maturity is S T X. Forward contracts do not involve any initial cash flow.
Forward Price The payoff of a forward contract at maturity is S T X. Forward contracts do not involve any initial cash flow. The forward price is the delivery price which makes the forward contract zero
More information1 Introduction to Option Pricing
ESTM 60202: Financial Mathematics Alex Himonas 03 Lecture Notes 1 October 7, 2009 1 Introduction to Option Pricing We begin by defining the needed finance terms. Stock is a certificate of ownership of
More informationIntroduction to Binomial Trees
11 C H A P T E R Introduction to Binomial Trees A useful and very popular technique for pricing an option involves constructing a binomial tree. This is a diagram that represents di erent possible paths
More informationRecursive Algorithms. Recursion. Motivating Example Factorial Recall the factorial function. { 1 if n = 1 n! = n (n 1)! if n > 1
Recursion Slides by Christopher M Bourke Instructor: Berthe Y Choueiry Fall 007 Computer Science & Engineering 35 Introduction to Discrete Mathematics Sections 71-7 of Rosen cse35@cseunledu Recursive Algorithms
More informationModeling and Performance Evaluation of Computer Systems Security Operation 1
Modeling and Performance Evaluation of Computer Systems Security Operation 1 D. Guster 2 St.Cloud State University 3 N.K. Krivulin 4 St.Petersburg State University 5 Abstract A model of computer system
More informationOptimization Modeling for Mining Engineers
Optimization Modeling for Mining Engineers Alexandra M. Newman Division of Economics and Business Slide 1 Colorado School of Mines Seminar Outline Linear Programming Integer Linear Programming Slide 2
More information5.1 Bipartite Matching
CS787: Advanced Algorithms Lecture 5: Applications of Network Flow In the last lecture, we looked at the problem of finding the maximum flow in a graph, and how it can be efficiently solved using the Ford-Fulkerson
More informationWelcome to the course Algorithm Design
HEINZ NIXDORF INSTITUTE University of Paderborn Algorithms and Complexity Welcome to the course Algorithm Design Summer Term 2011 Friedhelm Meyer auf der Heide Lecture 6, 20.5.2011 Friedhelm Meyer auf
More informationOverview. Option Basics. Options and Derivatives. Professor Lasse H. Pedersen. Option basics and option strategies
Options and Derivatives Professor Lasse H. Pedersen Prof. Lasse H. Pedersen 1 Overview Option basics and option strategies No-arbitrage bounds on option prices Binomial option pricing Black-Scholes-Merton
More informationChapter 21 Valuing Options
Chapter 21 Valuing Options Multiple Choice Questions 1. Relative to the underlying stock, a call option always has: A) A higher beta and a higher standard deviation of return B) A lower beta and a higher
More informationOptions Pricing. This is sometimes referred to as the intrinsic value of the option.
Options Pricing We will use the example of a call option in discussing the pricing issue. Later, we will turn our attention to the Put-Call Parity Relationship. I. Preliminary Material Recall the payoff
More informationUCLA Anderson School of Management Daniel Andrei, Derivative Markets 237D, Winter 2014. MFE Midterm. February 2014. Date:
UCLA Anderson School of Management Daniel Andrei, Derivative Markets 237D, Winter 2014 MFE Midterm February 2014 Date: Your Name: Your Equiz.me email address: Your Signature: 1 This exam is open book,
More informationLecture 5: Put - Call Parity
Lecture 5: Put - Call Parity Reading: J.C.Hull, Chapter 9 Reminder: basic assumptions 1. There are no arbitrage opportunities, i.e. no party can get a riskless profit. 2. Borrowing and lending are possible
More informationBINOMIAL OPTIONS PRICING MODEL. Mark Ioffe. Abstract
BINOMIAL OPTIONS PRICING MODEL Mark Ioffe Abstract Binomial option pricing model is a widespread numerical method of calculating price of American options. In terms of applied mathematics this is simple
More informationChapter 2: Binomial Methods and the Black-Scholes Formula
Chapter 2: Binomial Methods and the Black-Scholes Formula 2.1 Binomial Trees We consider a financial market consisting of a bond B t = B(t), a stock S t = S(t), and a call-option C t = C(t), where the
More informationDiscrete Applied Mathematics. The firefighter problem with more than one firefighter on trees
Discrete Applied Mathematics 161 (2013) 899 908 Contents lists available at SciVerse ScienceDirect Discrete Applied Mathematics journal homepage: www.elsevier.com/locate/dam The firefighter problem with
More informationNear Optimal Solutions
Near Optimal Solutions Many important optimization problems are lacking efficient solutions. NP-Complete problems unlikely to have polynomial time solutions. Good heuristics important for such problems.
More informationLecture 4: Properties of stock options
Lecture 4: Properties of stock options Reading: J.C.Hull, Chapter 9 An European call option is an agreement between two parties giving the holder the right to buy a certain asset (e.g. one stock unit)
More informationOffline sorting buffers on Line
Offline sorting buffers on Line Rohit Khandekar 1 and Vinayaka Pandit 2 1 University of Waterloo, ON, Canada. email: rkhandekar@gmail.com 2 IBM India Research Lab, New Delhi. email: pvinayak@in.ibm.com
More informationDirect Methods for Solving Linear Systems. Matrix Factorization
Direct Methods for Solving Linear Systems Matrix Factorization Numerical Analysis (9th Edition) R L Burden & J D Faires Beamer Presentation Slides prepared by John Carroll Dublin City University c 2011
More informationPart V: Option Pricing Basics
erivatives & Risk Management First Week: Part A: Option Fundamentals payoffs market microstructure Next 2 Weeks: Part B: Option Pricing fundamentals: intrinsic vs. time value, put-call parity introduction
More informationFIN 411 -- Investments Option Pricing. Options: Definitions. Arbitrage Restrictions on Call Prices. Arbitrage Restrictions on Call Prices
FIN 411 -- Investments Option Pricing imple arbitrage relations s to call options Black-choles model Put-Call Parity Implied Volatility Options: Definitions A call option gives the buyer the right, but
More informationLecture 21 Options Pricing
Lecture 21 Options Pricing Readings BM, chapter 20 Reader, Lecture 21 M. Spiegel and R. Stanton, 2000 1 Outline Last lecture: Examples of options Derivatives and risk (mis)management Replication and Put-call
More informationMax Flow, Min Cut, and Matchings (Solution)
Max Flow, Min Cut, and Matchings (Solution) 1. The figure below shows a flow network on which an s-t flow is shown. The capacity of each edge appears as a label next to the edge, and the numbers in boxes
More informationDynamic Programming 11.1 AN ELEMENTARY EXAMPLE
Dynamic Programming Dynamic programming is an optimization approach that transforms a complex problem into a sequence of simpler problems; its essential characteristic is the multistage nature of the optimization
More information1 Interest rates, and risk-free investments
Interest rates, and risk-free investments Copyright c 2005 by Karl Sigman. Interest and compounded interest Suppose that you place x 0 ($) in an account that offers a fixed (never to change over time)
More informationFIN-40008 FINANCIAL INSTRUMENTS SPRING 2008
FIN-40008 FINANCIAL INSTRUMENTS SPRING 2008 Options These notes consider the way put and call options and the underlying can be combined to create hedges, spreads and combinations. We will consider the
More informationECE302 Spring 2006 HW3 Solutions February 2, 2006 1
ECE302 Spring 2006 HW3 Solutions February 2, 2006 1 Solutions to HW3 Note: Most of these solutions were generated by R. D. Yates and D. J. Goodman, the authors of our textbook. I have added comments in
More informationA Constraint Programming based Column Generation Approach to Nurse Rostering Problems
Abstract A Constraint Programming based Column Generation Approach to Nurse Rostering Problems Fang He and Rong Qu The Automated Scheduling, Optimisation and Planning (ASAP) Group School of Computer Science,
More informationThe Trip Scheduling Problem
The Trip Scheduling Problem Claudia Archetti Department of Quantitative Methods, University of Brescia Contrada Santa Chiara 50, 25122 Brescia, Italy Martin Savelsbergh School of Industrial and Systems
More informationAlgorithm Design and Analysis
Algorithm Design and Analysis LECTURE 27 Approximation Algorithms Load Balancing Weighted Vertex Cover Reminder: Fill out SRTEs online Don t forget to click submit Sofya Raskhodnikova 12/6/2011 S. Raskhodnikova;
More informationSocial Media Mining. Graph Essentials
Graph Essentials Graph Basics Measures Graph and Essentials Metrics 2 2 Nodes and Edges A network is a graph nodes, actors, or vertices (plural of vertex) Connections, edges or ties Edge Node Measures
More informationReview of Basic Options Concepts and Terminology
Review of Basic Options Concepts and Terminology March 24, 2005 1 Introduction The purchase of an options contract gives the buyer the right to buy call options contract or sell put options contract some
More informationS 1 S 2. Options and Other Derivatives
Options and Other Derivatives The One-Period Model The previous chapter introduced the following two methods: Replicate the option payoffs with known securities, and calculate the price of the replicating
More informationAdditional questions for chapter 4
Additional questions for chapter 4 1. A stock price is currently $ 1. Over the next two six-month periods it is expected to go up by 1% or go down by 1%. The risk-free interest rate is 8% per annum with
More information