Introduction

Abstract

An equity option is a financial asset that gives its buyer the right (but not the obligation) to buy or sell a certain quantity of stocks or financial instruments on or before specified dates at a predefined price. To a certain extent, an option is similar to an equity future, except for the fact that the buyer has no commitment to buy or sell anything at the due date. Actually, options fall into two main classes (see e.g. Hull, Options, futures and other derivatives, 8th edn. Prentice Hall, Boston, 2011): vanilla and exotic that differ in exercise styles and payoff values. As their respective names make it rather clear, vanilla options are standard financial assets with a simple type of guaranty whereas exotic ones have more complex financial structures (e.g. a Barrier option structured such that the underlying stock has to reach a certain level to be active or inactive). To avoid specific technical and numerical problems, in this book we will focus on the vanilla type as it has been used in the academic literature as a benchmark for comparing empirical performances of pricing models. Basically, we wish to help readers to understand the value that the time series methodologies presented in this book can add to this well known basis before turning to securities with a more complex payoff.