Transcription of CHAPTER 5 OPTION PRICING THEORY AND MODELS
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CHAPTER 5 OPTION PRICING THEORY AND MODELS
1 CHAPTER 5 OPTION PRICING THEORY AND MODELSIn general, the value of any asset is the present value of the expected cash flows onthat asset. In this section, we will consider an exception to that rule when we will look atassets with two specific characteristics: They derive their value from the values of other assets. The cash flows on the assets are contingent on the occurrence of specific assets are called options and the present value of the expected cash flows on theseassets will understate their true value . In this section, we will describe the cash flowcharacteristics of options , consider the factors that determine their value and examine howbest to value of OPTION PricingAn OPTION provides the holder with the right to buy or sell a specified quantity ofan u
OPTION PRICING THEORY AND MODELS In general, the value of any asset is the present value of the expected cash flows on that asset. In this section, we will consider an exception to that rule when we will look at assets with two specific characteristics: • They derive their value from the values of other assets.
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