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How Much Should You Pay For A Financial Derivative?, Boyan Kostadinov
How Much Should You Pay For A Financial Derivative?, Boyan Kostadinov
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We explain some key mathematical ideas behind the no-arbitrage pricing of financial derivatives by replication, starting from a simple coin toss model and ending with the continuous-time limit of a multi-step coin-toss model using a geometric random walk model. In the limit, we obtain the classical Black-Scholes-Merton formula for pricing European call and put options.