Option Greeks
The Greeks are a group of mathematical derivatives applied to help manage or understand portfolio risks. They include delta, gamma, Theta, Vega, and rho. Delta Delta is the rate of change of the option’s price with respect to a given…
Black Option Valuation Model
The black option valuation model is a modified version of the BSM model used for options on underlying securities that are costless to carry, including options on futures and forward contracts. Similar to the BSM model, the black model assumes…
Expectations Valuation Approach
One-Step Binomial Tree The idea that a hedged portfolio returns the risk-free rate can determine the initial value of a call or put. The expectations approach calculates the values of the option by taking the present value of the expected…
Valuation of an Interest Rate Option (2022 curriculum)
Interest rate options are options with an interest rate as the underlying. A call option on interest rates has a positive payoff when the current spot rate is greater than the exercise rate. $$\text{Call option payoff}=\text{Notional Amount}\times[\text{Max}(\text{Current spot rate}-\text{Exercise rate,…
Binomial Option Valuation Model
One-Period Binomial Option Valuation Model In the one-period binomial model, we start today (at time t=0) when the stock price is \(S_{0}\). Then, the stock price can either jump upwards or downwards over the one-period time interval to t=1. This…
Study Notes for CFA® Level II – Derivatives – offered by AnalystPrep
Reading 37: Pricing and Valuation of Forward Commitments -a. Describe and compare how equity, interest rate, fixed-income, and currency forward and futures contracts are priced and valued; –b. Calculate and interpret the no-arbitrage value of equity, interest rate, fixed-income, and…
Pricing and Valuation of Interest Rate Swaps
Swaps are typically derivative contracts in which two parties exchange (swap) cash flows or other financial instruments over multiple periods for a give-and-take benefit, usually to manage risk. Both swap contract parties have future obligations. Thus, similar to forwards and…
