by Carole Bernard, Stephan Sturm
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Suggested foundations for options and derivatives pricing and portfolio construction. Specialist prerequisites vary by paper.
Build replication and risk-neutral probabilities in a tractable model.
Distinguish pricing probabilities from physical forecasts.
Understand the covariance structure of portfolio risk.
Read objectives, constraints and optimality conditions.
Connect the pricing equation, closed-form value and implied volatility.
Construct allocations and examine sensitivity to estimated inputs.
Turn mathematical weights into feasible portfolio decisions.
Start in discrete time, move to Brownian motion, then read the original pricing argument and simulate it.
Connect diversification, common risk factors, investor views, and the properties of a risk measure.