The dynamics of stock price and determination of investor’s cash flows valuation

Abstract

We consider the dynamics of share price, that is, upward and downward movement of share price at time t. We made use of binomial derivative pricing process of stochastic processes. Our aim is to also determine investor’s cash flows valuation generated from the investment. The investor invested her short position into N number of investment firms. The firms in turn invest the short position of the investor into the stock and bond markets in order to hedge out the risks associated with the investor’s portfolio. We determine the value of the cash flows at time, t = 0 by finding the value of the discounted cash flows using a suitable discount rate. We assume that the discount rate is deterministic. We found out that with different values of the investment at the initial time from the investment firms over time yield almost the same percentage change (not the same value at time t) with the same interest rate. In this paper, we assume that there is no transaction costs.

Journal of the Nigerian Association of Mathematical Physics, Volume 15 (November, 2009), pp 265 - 276