Types of options A call is an option to buy A put is an option to sell A European option can be exercised only at the end of its life An American option can be exercised at any time

Nature of Swaps A swap is an agreement to exchange cash flows at specified future times according to certain specified rules Options, Futures, and Other Derivatives, 5th edition 2002 by John C. Hull

Consumption vs Investment Assets Investment assets are assets held by significant numbers of people purely for investment purposes (Examples: gold, silver) Consumption assets are assets held primarily for consumption(Examples: copper, oil)

Three Alternative strategies Take a position in the option and the underlying Take a position in 2 or more options of the same type(a spread Combination: Take a position in a mixture of calls puts(A combination)

Categorization of Stochastic Processes Discrete time; discrete variable Discrete time; continuous variable Continuous time; discrete variable Continuous time; continuous variable Options, Futures, and Other Derivatives,5 th edition2002 by John.hull

The Stock Price Assumption Consider a stock whose price is s In a short period of time of length 8t, the return on the stock is normally distributed

Put-call parity p +spe-ql=c+Xer holds regardless of the assumptions made about the stock price distribution It follows that

Standard approach to Estimating Volatility Define on as the volatility per day between day n-1 and day n, as estimated at end of day Define S: as the value of market variable at end of day i

Binary options Nonstandard American Lookback options options Shout options Forward start options Asian options Compound options Options to exchange Chooser options one asset for another Barrier options Options involving

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