Option Pricing Theory Essay example
Undergraduate
Essay
Finance & Accounting
Pages 8 (2008 words)
Download 0
Option Pricing Theory Name: Abdullahi Warsame Institutional affiliation: London Metropolitan University Tutor: Luiz Vtiello Date Option Pricing Theory 2.1 Background to the problem Option Pricing Theory is any model or theory used for calculating the value of an option…

Introduction

An option provides the buyer the right to buy or sale the quantity of goods he or she wants at a fixed price known as the strike price. Since the process of buying an option is optional, the holder can choose not to buy or sale the assets. There are two options these are; right to buy and right to sale. Options can come in several varieties like; a put option, gives the seller an underlying price to sale an option (Bostock, 2004). A call option gives its holder the right to buy an option on its set price; these options depend on when the option is offered. Therefore, the paper aims at giving a theoretical analysis of option pricing theory. 2.2 Research questions The paper focuses on two main research questions; to determine the effects of option pricing theory and to explore ways of improving option pricing theory. 2.3 Significance of the research The research targets businessmen who take part in buying and selling of options using the option pricing theories. The research findings will provide them with the basis of calculating option prices. The study mainly delimits itself to the two option pricing theories (Black-Scholes model and binomial pricing option models). ...
Download paper
Not exactly what you need?

Related papers

Finance and Accounting Essay: Option Pricing
The loss that amounts is in the loss of cash or amount paid for the option. Determinants of an option are stated as stock price, volatility, strike price, risk free (short term) interest rate and time to the expiration. The contract in this case, is called the option contract (Don, 2004, 142). Options are used by holders for leverage or for protection. The leverage function helps the holder to…
Contribution of relevance and reliability on financial reporting.
Main objective of accounting policy is to produce fair valued accounting information that is highly reliable and relevant to the purpose and objectives of financials statement. Financial statements are the most important components of annual report that all public limited companies publish each year for the stakeholders of the company. The financial statements need to be the fair and ethical…
Option Pricing Model in Valuing a Company in the Context of Pfizer
His constant guidance and positive attention helped researcher to concentrate more on the research topic. The researcher would also like to thank his other professors for acting as a support system when required along with helping and guiding when needed and required. The support and cooperation of the University in allowing access to the library helped in referring to different study materials…
Capital Asset Pricing Model
This model has been heavily criticised and debated over the past decades, and many of the economists are of the opinion that this framework is not adequate enough to assess various risk factors comprehensively. However, none of the opponents could introduce a potential alternative to this concept till date. This paper will critically analyse the applicability of the CAPM in corporate finance…
Ff options can only be priced because they can be replicated, why do we need them?
Although derivatives are technically conspicuous reason being they can undergo replication using basic financial instruments, they are still the tools that provide those who participate in the market to full of risk to manage the particular risks. Nature of options dynamic replication Dynamic hedging of options is never conducted even with the market makers(Lussier & PareI, 2004). In nature,…
Johnson Controls
Information systems are also considered long-term capital investment projects. The following are some of the traditional capital budgeting models used to evaluate capital projects: The payback method The accounting rate of return on investment (ROI) The net present value The cost-benefit ratio The profitability index The internal rate of return (IRR) These methods rely on measures of cash flows…
Empirical Asset Pricing Theory
In other words, the paper will look at the negative covariance of SDF and excess returns. The paper will also outline the Fama-French factors. This will include entailing how these factors work, and the motives behind choosing or selecting of models. Finally, the paper will discuss how the technique used by Pastor and Stambaugh differ from the ones used by Fama-French factors. Stochastic Discount…