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Finance & Accounting
Pages 8 (2008 words)
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.
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). ...
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