B. Maddah
ENMG 625 Financial Engg II
07/07/09
Chapter 12 Basic Option Theory (2)
Early Exercise (Ross 2003)
Proposition One should never exercise an American style call
option before its expiration time T.
Proof. Suppose that the stock price at time t <

B. Maddah
ENMG 625 Financial Engg II
07/16/09
Chapter 13 Additional Option Topics (2)
The Three Greeks
The Greek letters, or simply the Greeks, define the sensitivity
of a derivative security price, f, (or of a portfolio of securities
value) to different

B. Maddah
ENMG 625 Financial Engg II
12/04/06
Chapter 14 Interest Rate Derivatives
Overview
Our study so far has assumed that the interest rate (i.e. the
term structure of interest) is known with certainty.
In reality, interest rates vary randomly simila

B. Maddah
ENMG 625 Financial Engg II
04/28/11
Exotic Options1
Definition
Standard, plain vanilla, (i.e., European and American)
options trade actively.
Nonstandard (exotic) options have been created by financial
engineers for a number of reasons.
E.g., g

B. Maddah
ENMG 625 Financial Engg II
07/07/09
Chapter 12 Basic Option Theory (1)
Option basics
An option is the right, but not the obligation, to sell or buy an
asset at specific terms.
E.g., the option of purchasing a home in exactly one year for
$200 K

B. Maddah
ENMG 625 Financial Engg II
07/14/09
Chapter 13 Additional Option Topics (1)
Overview and some History
We saw how binomial lattices can be used to price options.
Binomial lattices assume discrete state space and time points
where the stock price

Dr. Maddah
ENMG 625 Financial Engg II
10/16/06
Chapter 11 Models of Asset Dynamics (2)
Random Walk
A random process, z, is an additive process defined over
times t0, t1, , tk, tk+1, , such that
z (tk +1 ) = z (tk ) + k t ,
tk +1 = tk + t ,
where k are ii

Dr. Maddah
ENMG 624 Financial Engg I
03/15/06
Chapter 6 (Supplement)
Probability Primer1
Sample space and Events
Suppose that an experiment with an uncertain outcome is
performed (e.g., rolling a die).
While the outcome of the experiment is not known i

Dr. Maddah
ENMG 625 Financial Engg II
10/16/06
Chapter 11 Models of Asset Dynamics (1)
Overview
Stock price evolution over time is commonly modeled with
one of two processes: The binomial lattice and geometric
Brownian motion.
Both of these are stochasti

Z. Wahab
ENMG 625 Financial Engg II
04/26/12
Volatility Smiles
The Problem with Volatility
We cannot see volatility the same way we can see stock
prices or interest rates.
Since it is a meta-measure (a measure of another measure, the
price) the best we