January 2020
Beginner to intermediate
432 pages
11h 24m
English
Content preview from Python for Finance Cookbook
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Pricing European options using simulations
Options are a type of derivative instrument because their price is linked to the price of the underlying security, such as stock. Buying an options contract grants the right, but not the obligation, to buy or sell an underlying asset at a set price (known as a strike) on/before a certain date. The main reason for the popularity of options is because they hedge away exposure to an asset's price moving in an undesirable way.
A European call/put option gives us the right (but again, no obligation) to buy/sell a certain asset on a certain expiry date (commonly denoted as T).
Some popular methods of options' valuation:
- Using analytic formulas
- Binomial tree approach
- Finite differences
- Monte Carlo simulations ...
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