20.5 Valuing Options and Swaps
Up until now, we have talked about the value of an option at its maturity date. When the option is in the money (that is, when it has value), the value equals the difference between the price of the underlying asset on which the option is written and the strike price of the option. When the option is out of the money, its value is, of course, zero. In this section, we describe how option prices are determined prior to the maturity date.
Recall from Chapter 10 that the value of a share of stock is determined by the present value of the expected future dividends that the owner of the stock would receive. Similarly, the value of an option is determined by the present value of the expected payout when the option matures. ...
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