Visual Quantitative Finance: A New Look at Option Pricing, Risk Management, and Structured Securities

2. Random Variables and Option Pricing

This chapter explains the option pricing spreadsheet from Chapter 1. The explanation involves a mathematical concept called random variables. Random variables are the basic elements of statistics and quantitative finance. They describe the outcomes of uncertain events, such as estimating future stock prices, where it is impossible to know in advance exactly what might happen.

If you are familiar with random variables, you may want to skip down to the section “Building the Spreadsheet.” If you are not familiar with random variables, the following introduction contains the basics you need to follow the discussion. In this chapter, I cover only the aspects of the mathematics that apply directly to the pricing ...