An Introduction to Modeling Stock Price Returns With a View Towards Option Pricing
نویسندگان
چکیده
Financial options, namely stock options, are ways in which investors can manage the risk level of their portfolios and control the timing of various cash flows. Because, in most basic terms, this class of derivatives consists of agreements to buy or sell financial assets (here, shares of stock) at a prescribed time in the future, determining their fair market value requires a prediction of the future price of the asset to be bought or sold. Mathematical models are therefore employed to most accurately predict the future behavior of stock prices. The owner of a European-style1stock option has the “right, but not the obligation” to either buy2 or sell3 a share of stock S at time T for price K. In financial terms, S is the underlying asset, T the time of expiration, and K the strike price. The fair trading value of the option is derived as following:
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