SEMI FINAL Financial Option Valuation Techniques Flashcards
1997 noble Prize
Black-Sholes Option Pricing Model
Gives holder the right to purchase an asset at some future date
Call Option
Gives the holder the right to sell an asset at some future date
Put option
The price at which the holder agrees to buy or sell the share of stock when the option is exercised
Strike price or exercise price
The last date on which the holder has the right to exercise the option
Expiration date
Can be exercised on any date up to and including the exercise date
American option
Can be exercised only on the expiration date
European option
It can be derived from the binomial option pricing model by making the length of each period, and the movement of the stock price per period , shrink to zero and letting the number of periods grow infinitely large
Black-Scholes Option Pricing Model
5 Input Parameters to price the call
Stock price
Strike price
Exercise date
Risk-free rate
Volatility of the stock
It assumes two possible states for the next time period given today’s state
Binomial Option Pricing Model
An option can be valued using a ____ that replicates the payoffs of the option in different states.
Portfolio
A portfolio of other securities that has exactly the same value in one period as the otion
Two-state single-period model
There are more than two possible outcomes for the stock price in the real world
Multiperiod model
Also known as state-contingent prices, state prices, or martingale prices.
Risk-Neutral Probabilities
probabilities under which the expected return of all securities equals the risk-free rate. These probabilities can be used to price any other asset for which the payoffs in each state are known.
Risk-Neutral Probabilities
