Abstract
The basic equation of market price of option is formulated by taking assumptions based on the characteristics of option and similar method for formulating basic equations in solid mechanics: hv 0(t) = m 1 v 0 −1(t) − n 1 v 0(t) + F, where h, m 1, n 1, F are constants. The main assumptions are: the ups and downs of market price v 0(t) are determined by supply and demand of the market; the factors, such as the strike price, tenor, volatility, etc. that affect on v 0(t) are demonstrated by using proportion or inverse proportion relation; opposite rules are used for purchasing and selling respectively. The solutions of the basic equation under various conditions are found and are compared with the solution v f (t) of the basic equation of market price of futures. Furthermore the one-one correspondence between v f and v 0(t) is proved by implicit function theorem, which forms the theoretic base for study of v f affecting on the market price of option v 0(t).
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Yun, Tq. Analysis of Financial Derivatives by Mechanical Method (II)—Basic Equation of Market Price of Option. Applied Mathematics and Mechanics 22, 1004–1011 (2001). https://doi.org/10.1023/A:1016304107506
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DOI: https://doi.org/10.1023/A:1016304107506