PRC

Option pricing models

Replication, trees, Black–Scholes and the numerical methods that do the work in practice.

  1. 1

    Replication and risk-neutral pricing

    The one-period binomial, the hedge that prices it, and why risk-neutral probabilities are not beliefs.

  2. 2

    Black–Scholes

    The formula, what each term means, the assumptions, and the honest answer to what is wrong with it.

  3. 3

    Binomial trees

    Multi-period trees, CRR parameterisation, American options and convergence.

  4. 4

    Numerical methods

    Monte Carlo, finite differences and solving for implied volatility.

  5. 5

    Model limitations

    Stochastic and local volatility, jumps, and SABR.