Derivative Pricing – Topic Guide

Derivatives are instruments whose payoffs depend on the movement of underlying assets. The value of the derivative instrument therefore can be evaluated by creating and valuing a portfolio of assets whose prices are easily observed in the market and whose cash flows replicate those of the options. Buy Now

The methodologies used to price a derivative security may vary from closed form solutions such as the Black-Scholes option pricing formula, to numerical methods such as the binomial trees and Monte Carlo simulation.

Topics covered

    1. A Brief overview of relative pricing, risk neutral probabilities and the risk free rate
    2. Binomial option pricing basics
    3. An alternative method of implementing a two-dimensional binomial tree that allows the extension of a simple 3 step tree to a 50 – 100 step option pricing tree in a few minutes
    4. Pricing of the following options using this alternate methodology such as:
      • European calls and put options
      • American calls and put options
      • Knock in and knock out (sudden death) options


EXCEL files

The pre-packaged course also includes 3 EXCEL files covering the following concepts:

    1. The supporting excel file for the alternate binomial tree methodology for the products mentioned above
    2. Option pricing using the Traditional Binomial Tree approach
    3. Option pricing using the Black-Scholes option pricing formula


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