Option Markets, Valuation, and Hedging

Jiří Witzany

Chapter 4 in Derivatives, 2020, pp 77-140 from Springer

Abstract: Abstract Options can be compared to forward contracts where one of the counterparties pays a premium for the option to settle or not to settle. Options have become popular both on the OTC and on the organized exchange markets, but their valuation is more complex than in the case of forwards. It requires the underlying asset price volatility as a new input into the valuation models that have, at the same time, become a new market variable. We will explain how value options in the relatively elementary framework of binomial trees and in the theoretically more advanced context of stochastic asset price modeling. The last section will look at the issue of option portfolio hedging using the concept of so-called Greek letters.

Date: 2020
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DOI: 10.1007/978-3-030-51751-9_4

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