Advertisement

Option Pricing

Chapter
  • 369 Downloads

Abstract

In the previous chapter we examined some of the basic issues relating to options and looked at possible return profiles. In this chapter we look at the more complex question of option pricing, and in particular examine the factors that determine the price of an option, first intuitively and then analytically using the famous Black-Scholes option pricing formula which was put forward in a classic paper by Black and Scholes (1973). Although there have been many refinements to the Black-Scholes formula it has become one of the most famous equations of economics and is widely used by practitioners to determine appropriate option premiums. We also consider the relationship between call and put premiums via the put-call parity condition.

Keywords

Option Price Call Option Share Price Implied Volatility Strike Price 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

Further reading

  1. Haug, E.G. (1997) The Complete Guide to Option Pricing Formulas McGraw-Hill.Google Scholar
  2. Hull, J.C. (2003) Options Futures and Other Derivatives Prentice-Hall.Google Scholar
  3. Kolb, R.W. (2002) Futures, Options and Swaps 4th edn, Basil Blackwell.Google Scholar
  4. Natenberg, S. (1994) Option Volatility and Pricing: Advanced Trading Strategies and Techniques McGraw-Hill.Google Scholar

Chapter 15: The Pricing of Options

  1. Black, F. and Scholes, M. (1973) ‘The Pricing of Options and Corporate Liabilities’, Journal of Political Economy, May/June, pp. 637–54.Google Scholar
  2. Stoll, H.R. (1969) ‘The Relationship between Put and Call Option Prices’, Journal of Finance, December, pp. 801–24.Google Scholar

Copyright information

© Keith Pilbeam 2005

Authors and Affiliations

There are no affiliations available

Personalised recommendations