Page 82 - DCOM510_FINANCIAL_DERIVATIVES

Mahesh Kumar Sarva, Lovely Professional University
Unit 6: Valuation and Pricing of Options

Unit 6: Valuation and Pricing of Options Notes

CONTENTS
Objectives
Introduction

6.1 Valuation of Options
6.1.1 Basic Principles of Option Valuation
6.1.2 Put-Call Parity
6.2 Option Pricing
6.2.1 Primary Option Pricing Factors
6.3 Options Pricing Models
6.3.1 Binomial Options Pricing Model (BOPM)
6.3.2 Single Period Binomial Model
6.3.3 Binomial Option Pricing Model (BOPM) for PUTS
6.4 Black-Scholes Model for Call Options
6.4.1 Assumptions Underlying Black-Scholes Model
6.4.2 Black-Scholes European Model
6.4.3 Black-Scholes American Model

6.5 Summary
6.6 Keywords
6.7 Review Questions
6.8 Further Readings

Objectives

After studying this unit, you should be able to:
 Discuss the valuation of options and some basic principles;
 Explain the pricing of option;
 List the primary option pricing factors;
 Describe the options pricing models;
 Explain the Binomial options Pricing Model (BOPM) and Black-Scholes model for Call
Options.

Introduction

In the previous unit, we studied about the concept and features of options contracts. We also
discussed about the key terms used in options, basic types of options, distinction between
futures and options and concept of index derivatives. This unit will helps you to understand the
basic principles and concept of valuation of options. We will also learn the pricing of option. The
various sections and sub section of this unit will also summarise the primary option pricing
factors, options pricing models including Binomial options Pricing Model (BOPM) and Black-
Scholes model for Call Options.

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