act460 | undergraduate
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Introduction and Binomial Tree Models
- Apply the binomial model to determine the price of European put or call options using 2 or more time periods.
- Apply the binomial model to determine the price of American-style options and options on assets other than stocks.
- Explain the concept of risk-neutral probability and how it is used in the binomial model.
- Explain the put-call parity and the concept of a replicating portfolio.
- Explain the binomial model for pricing options including the implied replicating portfolio.
- Explain how the concept of the Brownian motion can be used to model stock prices including the distinction between arithmetic Brownian motion and geometric Brownian motion.
- Explain the Black-Scholes equation (framework) and how it can be used to model the dynamics of derivative prices.
- Apply Ito's Lemma to solve problems that involve the dynamics of derivative prices.
- Explain the Sharpe Ratio and its role in risk neutral pricing models.
The Black-Scholes Option Prices
- Explain the Black-Scholes option pricing formula.
- Apply the Black-Scholes formula to calculate the price of European put and call options.
- Explain the concept of delta hedging and the role of market makers.
- Apply the Black-Scholes formula and its derivatives (the âGreeksâ) and delta hedging to solve financial risk management problems.
Exotic Options and Other Topics
- Explain Asian, gap and barrier options.
- Explain exchange options.
- Explain how simulation methods can be used to determine option prices.
- Apply the put-call parity principles to determine the relationship between put or call prices at various strike prices or expiration dates.
Interest Rate Derivatives
- Explain the distinction between derivatives on bond prices and interest rate derivatives.
- Apply the Black-Dermond-Toy interest rate tree model to price interest rate derivatives.
- Explain equilibrium rate (risk neutral) models and their role in interest rate derivative pricing.
- Apply the Black, Vasicek and CIR models to pricing interest rate derivatives.
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