Core concepts
- 01Forward: customised OTC; Futures: exchange-traded standardised.
- 02Options: Call (right to buy), Put (right to sell); American (anytime) vs European (expiry).
- 03Option payoff at expiry: Call = max(S−K, 0), Put = max(K−S, 0).
- 04Black-Scholes model for European options on non-dividend-paying stock.
- 05Greeks: Delta (price sensitivity), Gamma, Theta, Vega, Rho.
Flowchart
Option Valuation | Intrinsic Value + Time Value = Premium | ITM / ATM / OTM | Models: Binomial / Black-Scholes | Greeks measure sensitivities
Exam-critical pointers
- ⭐Put-Call parity violation → arbitrage opportunity.
- ⭐Currency forward: Interest Rate Parity F = S × (1 + ih) / (1 + if).
- ⭐Swap: equivalent to series of forward contracts.
- ⭐Binomial model useful for American options & path-dependent options.
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