Chapter 2. OPTION PRICING METHODOLOGY

Peter G. Zhang
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Peter G. Zhang: Vice-President, Capital Markets Research, Chase Manhattan Bank, USA

Chapter 2 in Exotic Options:A Guide to Second Generation Options, 1997, pp 21-52 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThe following sections are included:EQUILIBRIUM AND ARBITRAGEEquilibriumArbitrageRelationship Between Equilibrium and ArbitrageBASIC OPTION TERMINOLOGYTHE BLACK-SCHOLES OPTION PRICING MODELPRICING OPTIONS USING THE ARBITRAGE-FREE ARGUMENTSOLVING PARTIAL DIFFERENTIAL EQUATIONSAnalytical MethodNumerical MethodFinite-DifferenceFinite-ElementRISK-NEUTRAL VALUATION RELATIONSHIPRisk-Neutral Valuation RelationshipCompounding and Discounting FactorsBlack-Scholes Formula Using RNVRMONTE CARLO SIMULATIONSLATTICE- AND TREE-BASED METHODMETHOD USED IN THIS BOOKQUESTIONS AND EXERCISESQuestionsExercisesAPPENDIXSolving Equation (2.3)Approximating N(x)

Date: 1997
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