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Option Markets, Valuation, and Hedging

In: Derivatives

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  • Jiří Witzany

    (University of Economics Prague)

Abstract

Options can be compared to forward contracts where one of the counterparties pays a premium for the option to settle or not to settle. Options have become popular both on the OTC and on the organized exchange markets, but their valuation is more complex than in the case of forwards. It requires the underlying asset price volatility as a new input into the valuation models that have, at the same time, become a new market variable. We will explain how value options in the relatively elementary framework of binomial trees and in the theoretically more advanced context of stochastic asset price modeling. The last section will look at the issue of option portfolio hedging using the concept of so-called Greek letters.

Suggested Citation

  • Jiří Witzany, 2020. "Option Markets, Valuation, and Hedging," Springer Texts in Business and Economics, in: Derivatives, edition 1, chapter 4, pages 77-140, Springer.
    • Handle: RePEc:spr:sptchp:978-3-030-51751-9_4
    DOI: 10.1007/978-3-030-51751-9_4
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