Almost everything in quantitative finance is built around one assumption: you hedge. You buy the option, you delta hedge, you eliminate risk, and the drift of the stock does not matter. Beautiful theory. But Chapter 59 of Wilmott’s book asks an uncomfortable question: what if you are not hedging?
Book: Financial Markets and Institutions, 11th Edition Author: Jeff Madura Publisher: Cengage Learning, 2015 Series: Chapter 14 Review
Options give you the right, but not the obligation, to buy or sell something at a specific price by a specific date. That “not the obligation” part is what makes them different from futures. Chapter 14 covers call options, put options, what drives their prices, and how they are used to speculate and hedge.