Equity Derivatives Homework Help
What is an equity derivative? Well, it is a financial instrument with a value that is based on the underlying asset's equity movements. A stock option can be considered an example of a derivative because it has a value that is dependent on an underlying stock price movement. Risks that are associated with taking short or long positions in stocks can be hedged using equity derivatives. Also, investors can use equity derivatives to speculate on the underlying asset's price movements.
MATLAB has an equity derivative toolbox that has functions that support the pricing of derivatives, hedging analysis, and sensitivity computation. Our eminent MATLAB experts are well-acquainted with all the functionalities of this toolbox. You should opt for our equity derivatives homework help if you need assistance with the following concepts:
• The pricing of derivatives using trees
Crrprice, ittprice, and eqpprice are portfolio pricing functions that can be used to calculate the prices of any set of supported instruments. The calculation will be based on a binary equity price tree, a standard trinomial tree, or a binary equity price tree. The functions we have mentioned above can be used to price the following types of instruments:
ü Vanilla stock options such as European and American puts and calls
ü Exotic options including Asian, Barrier, lookback, compound, and stock options (call schedules and Bermuda put).
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• Understanding Equity Trees
MATLAB's financial toolbox also caters to a number of recombining tree models that are used to represent stock price evolution. They include:
ü CRR ( Cox-Ross- Rubinstein) Model
ü EQP (Equal Probabilities) Model
ü ITT (Implied Trinomial Tree ) Model
ü LR (Leisen-Reimer) model
ü STT ( Standard Trinomial Tree) model
The aforementioned models are all encompassed under discrete-time models. It means that they divide time into discrete bits. In other words, it is only possible to compute prices at these particular times. One of the widely used techniques or methods used in stock price evolution modeling is the CRR model. The greatest strength of this model is its simplicity. It is commonly used when professionals are dealing with several tree levels.
The EQP model can build a tree with exact volatility in each tree node regardless of the fact that time steps are small in numbers. Experts say that this model provides far better results than the Cox-Ross-Rubinstein model in some trading environments. The LR model, not only uses a few steps to produce estimates that are close to those produced by the Black-Scholes model but also minimizes the oscillation. The Implied Trinomial Tree model is based on CRR. It uses the prices from the liquid options market to develop a tree that accurately represents the market. This model is often used in exotic options pricing. It does this by ensuring that the prices of exotic options are consistent with the standard options’ market prices. The STT is sometimes considered more accurate and stable than the binomial model when used to price exotic options.
• Equity Derivatives Using closed-form solutions
There are four analytical approximations and closed-from solutions that are available in MATLAB's financial instruments toolbox. They can be used to compute sensitivities and the price of vanilla options. These four are:
ü The Black-Scholes Model – A popular model that is widely used to price European calls and puts.
ü Black model – It is used for pricing European options on forwards or features.
ü Roll-Geske-Whaley model – It is an estimation method used to price American call options
ü Bjerskund-Stensland 2002 model – This model is used to price American calls and puts with dividend yields that are continuous.
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ü Monte-Carlo simulation pricing
ü Price using Finite Differences
ü Portfolio valuation
ü Price convertible bonds
ü Price using tree models and many more
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