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Hedge Pricing

PreviousDetermining Strike PricesNextContracts

Last updated 1 year ago

In this section, we include the effect of trading fees on risk-neutral pricing, which we will denote with the variable ccc.

using Ο•k\phi_kΟ•k​ to denote the proportion of the hedge purchased for a given strike in a given epoch, the return for "selling" it can be shown as

APRk=12Γ—(1βˆ’c1βˆ’Ο•k),APR_k=12\times\left(\frac{1-c}{1-\phi_k}\right),APRk​=12Γ—(1βˆ’Ο•k​1βˆ’c​),

and in order for a no-arbitrage environment, we must have the relation

Pk=Ο•k1βˆ’c.P_k=\frac{\phi_k}{1-c}.Pk​=1βˆ’cΟ•k​​.

It should be noted that although the APR for selling a hedge may seem quite high, there is always a probability PkP_kPk​ of the seller's entire position being liquidated.

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