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Teaching Notes

Kyle's Lambda

A measure of market impact cost from Kyle (1985), which can be interpreted as the cost of demanding a certain amount of liquidity over a given time period.

Call Option Value from Two Approaches

Suppose today the stock price is \(S\) and in one year time, the stock price could be either \(S_1\) or \(S_2\). You hold an European call option on this stock with an exercise price of \(X=S\), where \(S_1<X<S_2\) for simplicity. So you'll exercise the call when the stock price turns out to be \(S_2\) and leave it unexercised if \(S_1\).