7.4.2 Options - Pricing Model - Black Scholes.pptx - FINANCIAL ENGINEERING OPTIONS KRIPA SHANKER Ph D(Cornell FNAE FIE(I FITEE(I LMISTE LMIIIE MORSI

7.4.2 Options - Pricing Model - Black Scholes.pptx -...

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OPTIONS OPTIONS KRIPA SHANKER Ph D (Cornell) FNAE, FIE(I), FITEE(I), LMISTE, LMIIIE, MORSI, MORSA, SMIIE Visiting Faculty Department of Mechanical Engineering Indian Institute of Technology (BHU) Varanasi Former Emeritus Fellow Industrial and Management Engineering Department Indian Institute of Technology Kanpur Former Vice Chancellor, Uttar Pradesh Technical University Lucknow Former Deputy Director, Indian Institute of Technology Kanpur KRIPA SHANKER Ph D (Cornell) FNAE, FIE(I), FITEE(I), LMISTE, LMIIIE, MORSI, MORSA, SMIIE Visiting Faculty Department of Mechanical Engineering Indian Institute of Technology (BHU) Varanasi Former Emeritus Fellow Industrial and Management Engineering Department Indian Institute of Technology Kanpur Former Vice Chancellor, Uttar Pradesh Technical University Lucknow Kanpur FINANCIAL ENGINEERING FINANCIAL ENGINEERING
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Kripa Shanker Ph D (Cornell) 3 Financial Engineering Financial Engineering PRICING OF OPTIONS Black - Scholes Model PRICING OF OPTIONS Black - Scholes Model OPTIONS OPTIONS
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OPTIONS WHAT IS AN OPTION? A stock option is a derivative security , because the value of the option is “derived” from the value of the underlying common stock. There are two basic option types. Call options are options to buy the underlying asset. Put options are options to sell the underlying asset. Listed option contracts are standardized to facilitate trading and price reporting . Listed stock options give the option holder the right to buy or sell 100 shares of stock. RECAL L
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OPTIONS WHAT IS AN OPTION? Definition: a type of legal contract between two investors where one grants the other the right (but not the obligation) to buy or sell a specific asset at a preset price in the future . the option buyer is buying the right to buy or sell the underlying asset at some future date. the option writer is selling the right to buy or sell the underlying asset at some future date. RECAL L
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OPTIONS The minimum terms stipulated by stock option contracts are: The identity of the underlying stock . The option contract size . The strike price, or exercise price . The option price (Premium) The option expiration date, or option maturity. The option exercise style ( American or European ). The delivery (or settlement) procedure . A list of available option contracts and their prices for a particular security is known as an option chain . RECAL L
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Notation S = the price of the underlying asset (stock) (we will refer to S 0 =S, S t or S T ) C = the price of a call option ( premium ) (we will refer to C 0 =C, C t or C T ) X or K = the exercise or strike price T = the expiration date t = a time index OPTIONS
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Black-Scholes is a pricing model used to determine the fair price or theoretical value for a call or a put option based on six variables such as volatility, type of option, underlying stock price, time, strike price, and risk-free rate. The quantum of speculation is more in case of stock market derivatives, and hence proper pricing of options eliminates the opportunity for any arbitrage. There are two important models
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  • Fall '17
  • MKrishnaErramilli

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