Derivative Pricing 1

Module code: MN3112

This module will introduce you to the fundamental pricing models of financial options. We will firstly introduce options contracts and their mechanisms, focusing on stock options. Successively, we will analyse the difference between European and American options, deriving both European and American put-call parity relationships. Then we will extensively study the binomial model of option pricing, applying it to a variety of relevant financial situations. After reviewing some elementary notions of probability theory, including normal distributions, we will conclude with an extensive study of the Black-Scholes model of option pricing and its underlying assumptions. Interesting applications of the Black-Scholes model are also illustrated.

Topics covered

  • Options contracts
  • Put/call options
  • European/American put-call parity
  • Binomial model
  • Black-Scholes model

Learning

  • 10 hours of lectures
  • 4 hours of seminars
  • 61 hours of guided independent study

Assessment

  • Exam, 1 hour (100%)