Lectures 14 & 15 Options, Futures, and Derivatives

Stephen Kinsellawww.stephenkinsella.net

Definition(s)Age Old Futures

Today's derivatives marketsTime.Intrinsic.Values

The Black Scholes ModelSome Numerical Examples

Remember this:

The Philosopher’s story.

An option is a financial product which gives the holder the right but not the obligation to buy or sell the

underlying asset at a predetermined price.

Derivatives are financial instruments that derive their value from the prices of one or more other assets such as stocks, bonds, foreign currencies, or commodities.

Derivatives serve as tools for managing risks associated with these underlying assets. The most common types of

derivatives are options and futures.

A financial contract is a derivative security on a contingent claim if it's value at expiration time T is

determined exactly by the market price of the underlying cash asset at time T.

Valuing Options.

Calls and Puts

Intrinsic and Time Value

Mathematica

Derivation

Mathematica

Sensitivities

Mathematica

Next time: Behavioural Finance. Read Shiller, Kahneman, and Ritter, in coursepack.