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Principles of Financial Engineering, 3rd Edition by Elsevier Science

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Chapter 11

Options Engineering with Applications

This chapter builds on the earlier discussion of option pricing and presents applications of options engineering. First we discuss how options can be used to create synthetic stock positions. We derive the put-call parity theorem and present arbitrage strategies that can result from its violation. The chapter explains yield enhancement strategies such as call overwriting. Moving on to volatility-based strategies, we then discuss options strategies such as straddles and strangles as well as risk reversals. Finally, we introduce exotic options such as barrier options, knock-in and knock-out options and butterfly strategies and explain how they are related and priced relative to plain vanilla call ...

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