4 EUROPEAN OPTION PAYOFF DYNAMICS

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• 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