SYLLABUS
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Random nature of markets
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4.1 Plain vanilla stock
4 EUROPEAN OPTION PAYOFF DYNAMICS
4.1 Plain vanilla stock options
4.1.1 The European Black-Scholes model for dummies
4.1.2 Parameters illustrated with VMARKET experiments
4.1.3 Application, time value and implied volatility
4.2 Exotic stock options
4.2.1 Binary options
4.2.2 Barrier options
4.3 Methods for European options: analytic formulation
4.3.1 Transformation to log-normal variables
4.3.2 Solution of the normalized diffusion equation
4.3.3 Black-Scholes formula
4.4 Methods for European options: finite differences (FD)
4.4.1 Naive implementation using financial variables
4.4.2 Improved scheme using log-normal variables
4.5 Methods for European options: Monte-Carlo sampling (MCS)
4.5.1 Forecast possible realizations of the underlying asset
4.5.2 Expected value of an option from sampled data
4.6 Computer quiz
4.7 Exercises
4.8 Further reading and links
4.9 Quick intermediate evaluation form