The world of investing is not limited to stocks and bonds; there are many other financial instruments investors can choose from. Derivatives, which are assets that derive their value from the value of an underlying asset, are one of them; and options are one type of derivative. In this chapter we’ll discuss the basics of this financial instrument, including how they are priced and how they can be used to enhance returns or limit risk.

The basics

We have already discussed real options, so in this chapter we’ll focus on financial options. As the name suggests, in this case the underlying ...

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