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Lecture 1 ​

syllabus is chapter 20 & 21 for option pricing.

  • chapter 20.1 = Understanding Options
  • chapter 20.2 = Combining products to create new ones
  • chapter 20.3 = first look at pricing options
  • Chapter 21 is how to price them.

derivative products =

derivatives = financial securities/instruments whose payoffs are only dependen ton the value of some other asset/product

payoff contract = gain/loss that the contract brings at that time, bound to time -> payoff today != payoff tomorrow

forward contract = buy/sell a specific amount of an asset at a specific price & time

forward market = trades these forward contracts for future delivery

spot market = where trading takes place for immediate delivery (sell the product) payoffs with associated with options

  • long position = the person who is set to buy

  • short position = the person who is set to sell

  • underlying = the product that is being bought/sold

  • forward price = the price per unit in the contract

  • maturity = the expiry date / validity date of the contract

  • binding contract = buyer must buy, seller must sell

on the day of the writing of the contract it is nothing

🔀 Swap ​

swap = contract/agreement to exchange one cash flow for another

comomodity swap = Party A makes an agreement to receive N units of commodity at fixed price P

📢 Option ​

option = contract which gives the right (but not the obligation) to buy/sell specific number of units of an underlying asset at a specific price by/at a specific time

In an option you have the right to buy the mentioned units for the mentioned price in the contract. You don't need to buy it, you just may buy it.

  • option price = the price of the paper

  • exercise / strike price = is the price written on the paper

  • call option = right to buy on the paper

  • put option = right to sell on the paper

  • European option = on ...

  • American option = on-or-before

Call Option = buyer has right to buy, when buyer wants to buy, seller must sell

Put Option = seller has right to sell, when buyer wants to buy

💵 Pricing Financial Products ​

Call Value = the profit the buyer can make with the contract

Put Value = the profit the seller can make with the contract

Payoff = the price a year later

Price = the price to buy at now

Risk Neutral Probabilities ​

Return of the stock should be the same as you would have put it in the bank.

85∗1,02=90,1∗p+84,7∗(1−p)

$p = 0,3704 $