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FINANCIAL MARKET COURSES

Options - Replication, Risk-Neutrality, & Black-Scholes

Although options in financial markets have a long history, it is only recently that option pricing has been seen as having a sound theoretical basis. This course introduces the Black-Scholes pricing model for options, one of the most famous in modern finance. It examines the foundations of the approach, particularly the key issues of replication and risk-neutrality, and gives examples of both the basic pricing formula and the simple extensions that followed soon after. It also highlights some potential shortcomings with the approach.

  • OBJECTIVES

    On completion of this course, you will be able to:

    Explain the concepts of the riskless portfolio and risk-neutrality

    Price simple European options using the basic Black-Scholes 'family' of option pricing models

    List the shortcomings of the Black-Scholes approach

  • COURSE OUTLINE

    Topic 1: The Riskless Portfolio

    Problems with Option Pricing

    Riskless Portfolio

    Replicating Portfolio

    Extension to Continuous Time

    Risk-Neutrality

    Topic 2: The Black-Scholes approach to Option Pricing

    The World of Black-Scholes

    The Black-Scholes Equation

    The Pricing Formulas

    Understanding the Pricing Formula

    Pricing Formula – An Example

    Simple Extensions of the Black-Scholes Model

    Merton Model

    Merton Model – An Example

    Drawbacks of the Merton Model

    Garman-Kohlhagn Model

    Black Model (Black-76 Model)

    Communication in Terms of Volatility

    Topic 3: Beyond Black-Scholes

    Limited Range of Options

    The Perfect Market

    The Volatility Surface

  • PREREQUISITE KNOWLEDGE

  • ESTIMATED COMPLETED TIME

    75 Minutes

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