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An Initial Attempt at Pricing an Option

In: Derivative Security Pricing

Author

Listed:
  • Carl Chiarella

    (University of Technology Sydney)

  • Xue-Zhong He

    (University of Technology Sydney)

  • Christina Sklibosios Nikitopoulos

    (University of Technology Sydney)

Abstract

This chapter uses the concepts developed in Chap. 2 to illustrate the problem of option pricing as a discounted expected option payoff. By assuming that investors are risk neutral and using the Kolmogorov equation for the conditional probability, we demonstrate how the Black–Scholes option formula can be arrived. We also illustrate how the option price can be viewed in a quite natural way as a martingale and the Feynman–Kac formula, two very important concepts of continuous time finance.

Suggested Citation

  • Carl Chiarella & Xue-Zhong He & Christina Sklibosios Nikitopoulos, 2015. "An Initial Attempt at Pricing an Option," Dynamic Modeling and Econometrics in Economics and Finance, in: Derivative Security Pricing, edition 127, chapter 0, pages 37-53, Springer.
    • Handle: RePEc:spr:dymchp:978-3-662-45906-5_3
    DOI: 10.1007/978-3-662-45906-5_3
    as

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