Pricing a financial derivative - the call option
Pricing a financial derivative - the call option
- Event time: 11:30am until 12:30pm
- Event date: 7th November 2018
- Speaker: Anthony Wood (Formerly School of Physics & Astronomy, University of Edinburgh)
- Location: Room 2511, James Clerk Maxwell Building (JCMB) James Clerk Maxwell Building Peter Guthrie Tait Road Edinburgh EH9 3FD GB
Event details
Suppose you want to make some money on the stock market. The usual place to start is to buy a stock and hope its price goes up. However, if it goes down you risk losing a lot of money! Alternatively, you could buy an call option on the stock. This is a financial product that grants you the right to purchase a stock at a fixed future date, for a fixed pre-agreed price. If the stock ends up above the agreed price you are in to make a profit. If the stock crashes, you simply don’t use the option, and only lose the amount you paid for it.
In this talk I discuss what is a good price to pay for an option given the unpredictability of stock prices, and derive an explicit formula when modelling the stock price as a mean-reverting stochastic process.
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