SUMMARY:
• Lecture 1 title slide (slide 1)
• description of Dan's plight (slides 2-3)
• assumptions on Euros and bank (slide 4)
• Alice's offer to Dan (slide 5)
• Alice's hedging strategy (slide 6)
• one month later, the two scenarios (slides 7-9)
• a view of Alice's hedging portfolio (slide 10)
• how Alice decided on her price, by solving three equations in three unknowns (slides 11-13)
• the risk-free rate compared to the uptick and downtick factors; the 60-40 coin-flipping game (slide 14)
• expected payoff and its present value; coincidence? (slide 15)
• future lecture on "The Risk-Neutral World" or "Coin-flippers got hedge" (slide 16)
• the hedge parameteres (slide 17)
• the option difference over the Euro difference; coincidence (slide 18)
• future lecture on "Delta-Hedging" or "Pricers got hedge" (slide 16)
• description of Earl's plight (slide 20)
• Beth's offer to Earl (slide 21)
• related coin-flipping game; Beth's price (slide 22)
• exercise: find Beth's hedge parameters (slide 23)
• description of Fred's two month plight and of Cathy's offer (slide 24)
• the evolution of the Euro and Cathy's payoff to Alice and Beth (slide 25)
• related coin-flipping game; Cathy's price (slide 26)
• the evolution of the Euro; working back from the final payoff to Fred to the value of Cathy's option (slide 27)
• related two-step coin-flipping game (slide 28)
• coin-flippers got price once again; exercise: find Cathy's hedging strategy before passing off the option to Alice or Beth (slide 29)
• Cathy doesn't need Alice or Beth; she can adjust her hedge (slide 30)
• going from a two-step option to an N step option, with large N (slide 31)
• future lecture on "The Central Limit Theorem" or "Mathematicians got coin-flipping" (slide 16)
• summary of future lectures; final conclusion: mathematicians got it all (slide 32-33)