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Option Pricing

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  OPTION PRICING Bhabani Shankar Parida Product Specialist / WB - FMSD  John C. Hull, Options, Futures and Other Derivatives (6th Edition)     New York: Prentice Hall Ch-11  Binomial Trees One-step Binomial Risk  – Neutral Valuation Two-step Binomial Trees Matching Volatility with u and d Ch-13  Black  – Scholes-Merton Model Stock Price Properties Volatility Black  – Scholes  – Merton Differential Equation Black  – Scholes Option Pricing Formulas Black  – Scholes  – Merton Risk-Neutral Valuation Implied Volatilities  Hull, Chapter 9 Properties of Stock Options   Bhabani Shankar Parida Product Specialist / Global Markets Risk Applications      Factors Affecting Option Prices   Upper and Lower Bounds for Options Prices   Put  – Call Parity   European and American Call Options   Dividends  6 Factors Affecting Option Prices  Notations: S o Current stock price K Strike price (aka, exercise price) T Time to expiration (aka, term) S T    Stock price at maturity R Continuously compounded risk-free interest rate C Value of American call option (option to buy one share) P Value of American put option (option to sell one share) c Value of European call option (option to buy one share)  p Value of European put option (option to sell one share)  Factors Affecting Option Prices   Identify the six factors that affect an option’s price and discuss how the six factors affect an option’s price for both European and American options. In the chart below, we show the directional impact of each input on the value of a call or put:
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