Options (I): General Description, Parity Relations, Basic Concepts, and Valuation Using the Binomial Model

Patrice Poncet () and Roland Portait
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Patrice Poncet: ESSEC Business School
Roland Portait: ESSEC Business School

Chapter 10 in Capital Market Finance, 2022, pp 353-397 from Springer

Abstract: Abstract Option theory, which was developed at the start of the 1970s by Black, Scholes, and Merton, constituted a major advance in economic and financial theory. The applications of this theory extend well beyond its use for options. Not only do numerous financial products have option components (convertible bonds, caps and floors, hybrid products, …, and even the bonds and shares issued by limited companies where there is a risk of bankruptcy) but many decisions have an aspect that can only be understood in terms of options (investments, analysis of credit risk, etc.). Option theory provides tools that not only allow to price optional components but also to manage portfolios of assets and liabilities that may include them. By greatly improving our understanding of financial mechanisms and risk management, option theory has significantly contributed to the increase in activity on financial markets.

Date: 2022
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DOI: 10.1007/978-3-030-84600-8_10

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