10

OPTIONS – BASICS AND PRICING

10.1 Why options are different

10.2 Definitions

10.3 Options terminology

10.4 Value and profit profiles at maturity

10.5 Pricing options

10.6 The behaviour of financial prices

10.7 The Black–Scholes model

10.8 The binomial approach

10.9 The Monte Carlo approach

10.10 Finite difference methods

Each of the financial engineering tools discussed so far in this book has, in its own way, made an important contribution to the successful management of financial risk. FRAs, interest rate swaps and STIR futures allow a borrower to secure a guaranteed rate of interest for months or years into the future. A forward currency deal provides a company with foreign currency at an exchange rate fixed, once again, months or ...

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