Options II: Pricing and Valuation

In this chapter we build on the introduction to asset price dynamics discussed in the previous chapter to describe the pricing of option contracts. The content is essentially a summary of the research into finance theory and option pricing carried out by a number of leading academics since the first presentation by Black and Scholes and Merton in 1973.

44.1 Option pricing

When we have discussed all the interest rate products described in this book so far, both cash and derivatives, it has been possible to determine pricing due of rigid mathematical principles, and also because on maturity of the instrument there is a defined procedure that takes place such that one is able to calculate a fair value. This does ...

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