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Derivatives Pricing

Derivatives Pricing

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.

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

Option pricing using the Black-Scholes option pricing formula