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Paulo's Report (Introduction To Option Markets)
Paulo's Report (Introduction To Option Markets)
The principles of the binominal option pricing model and how it is derived.
Option contract
An option is a contract in which the writer of the option grants the buyer of
the option the right, but not the obligation, to purchase from or sell to the
writer something at a specified price within a specified period of time (or
at a specified date). The writer, also referred to as the seller, grants this
right to the buyer in exchange for a certain sum of money, which is called
the option price or option premium.
Intrinsic Value
The price at which the option owner is allowed to either buy or sell the
underlying asset is called the strike price
Intrinsic value is only one component of option pricing, the other is time
value, which is equal to the option price less the intrinsic price.
Time Value
As indicated, the underlying price and strike price determine the intrinsic
value; the time until expiration and volatility determine the probability of a
profitable move; the interest rates determine the cost of money; and
dividends can cause an adjustment to share price.
The financial derivatives are financial instruments, that are recently created, and
whose main application is to be used as a tool for managing financial derivatives. The
most significant financial derivatives are options that are mostly used for their
flexible and non-standard character. Options, and the other financial derivatives, as
well, are instruments that are derived from some other financial instruments that
makes them more complicated from one hand, and more risky, from the other hand.
Their role is very important for the developing the financial system, and generating
economic growth. The subject of research in this paper is the options as an
unstandardized financial derivatives, and their basic characteristics and usage in
developed, and developing countries. The prime goal is to research the importance of
these derivatives in developing countries, with basic focus in the Republic of
Macedonia. The results from these paper should suggest if the options are curtail for
the developing the Macedonian financial markets.
outperformance options
OUTPERFORMANCE OPTION