By Frans de Weert
Explaining the idea and perform of ideas from scratch, this publication specializes in the sensible facet of techniques buying and selling, and offers with hedging of recommendations and the way concepts investors earn a living through doing so. universal phrases in choice concept are defined and readers are proven how they relate to profit. The booklet provides the required instruments to accommodate techniques in perform and it contains mathematical formulae to raise reasons from a superficial level. through the booklet real-life examples will illustrate why traders use choice constructions to fulfill their wishes.
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Additional resources for An introduction to options trading
Of course, since the price of a European put option decreases as the interest rate increases, this derivative should be negative for the put option. For a call option it is hard to deduce economically what the sign of this derivative should be. The next formulae give for both the call and the put option the sign of the derivative of the option price with respect to the interest rate. It appears that for the call option this derivative is positive, which means that the price of the call option increases as the interest rate increases: @ct ¼ KðT À tÞ eÀrðTÀtÞ Nðd2 Þ > 0 ð2:9Þ @r @pt ¼ ¼ ÀKðT À tÞ eÀrðTÀtÞ NðÀd2 Þ < 0 ð2:10Þ @r call;European ¼ put;European From an economical point of view it is logical that the price of a European put option is less when the interest rate is higher.
Now suppose that the interest rate was not 5% but 6%. Higher interest rates cause expected growth rates on stocks to increase, otherwise inves- THE BLACK–SCHOLES FORMULA 23 tors in stocks could be tempted to sell their stocks and put the money in a savings account. This means that the expected payoff of a put option is likely to be less. Although this is generally true, suppose that the expected payoff to the holder of the long position does not change and will still be $10:5. The question is: What should the price of the option be in this case?
It is beyond the scope of this book to actually prove this formula. Although it looks very complicated, do not be deterred. It is only for the sake of completeness that the Black– Scholes is stated here. It is perfectly possible to work with options without fully understanding the Black–Scholes formula. The most important thing to remember from the Black–Scholes formula is that it depends on the strike price (K), stock price (St ), time to maturity (T À t), interest THE BLACK–SCHOLES FORMULA 27 rate (r), volatility () and dividends.
An introduction to options trading by Frans de Weert