Based On The Modified Black-Scholes Option Pricing Model Of Hedging

Finance is the core of modern economy,the number and the development of financial derivative products concentrated expression of the scale of the development of the market.Now financial derivatives in international financial markets occupy an important position and plays an important role,which is known as the core of a broad capital market.The so-called financial derivatives refers to derived from the traditional financial instruments such as currency,foreign exchange,stocks,bonds and commodities,the new investment instruments's price are closely related to the general commodities and financial instruments.Financial derivatives is an essential tool for risk management.Therefore,the reasonable pricing of financial products is especially important.Options is a basic financial derivatives,it is the successful example of international market innovation in the 20th century.So far from 1973 a short span of 30 years,the options market has become an important part in the international financial markets.Many countries and regions to establish a formal Options Exchange,in many countries options will be included in a future capital market development plan.In this paper,the use of Black and Shcoles option pricing formula for the calculation of the replication portfolio approach,you can use the existing assets such as stocks,bonds,risk-free assets,through self-financing trading strategy composition a portfolio which have the same function of a financial derivatives in order to achieve effective risk management.This paper conducts the research from three aspects:1.the underlying asset to pay dividends and to consider of transaction costs;2.When the risk-free interest rates r and the underlying asset's volatilityσ,as well as the dividend yield q are for the time variable situation;3.Assumed that the stock price process subject to the new model of mixed-case;Through the above-mentioned case studies,on the Black-Scholes model to be amended and extended,and then solving the model in order to estimate the requirements of each case holding the subject of hedging assets and the share of risk-free assets.