This course focuses on an alternative method of implementing a two-dimensional binomial tree compared to the traditional method of building a binomial tree in excel presented in most option pricing text books. The alternate approach is based on the techniques documented by Professor Mark Broadie
The Derivatives and Options Crash Course was the very first course written for Concepts.com in the summer of 1999. This was the content that was used to run the first focus group on the product in Kamal Jeddidi’s class on product development. Interestingly enough while
Building blocks and synthetic configurations The basic building blocks in the derivative world are the three contract types that we have just discussed. It is possible to combine any number of them in a configuration that has a desired payoff profile. Product Position Direction Call
Option Payoff profiles for Calls and Puts Compare this to the pay off profile for an option contract. Unlike a forward, there is only a limited downside with option contracts. An option gives its owner the right to exercise but not the obligation to perform
Payoff Profiles A payoff profile shows the scenarios under which a trade will make money and the scenarios under which a trade will lose money. In the most common case it is a simple graph that plots the change in price of the underlying security
Forward Contracts When you buy a Metro Card, you enter into an agreement with the Transit Authority. You agree to buy transport services in the future while the MTA agrees to sell you the same. The price for these future purchases is set by MTA
A derivative instrument is very similar to bottled water in the Gobi Desert. Its value is determined completely by external variables. The external factor could be anything but in general is either a financial asset or an economic variable (such as interest rates). The external factor or variable is called the underlying.