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Options (I): General Description, Parity Relations, Basic Concepts, and Valuation Using the Binomial Model

In: Capital Market Finance

Author

Listed:
  • Patrice Poncet

    (ESSEC Business School)

  • Roland Portait

    (ESSEC Business School)

Abstract

Option theory, which was developed at the start of the 1970s by Black, Scholes, and Merton, constituted a major advance in economic and financial theory. The applications of this theory extend well beyond its use for options. Not only do numerous financial products have option components (convertible bonds, caps and floors, hybrid products, …, and even the bonds and shares issued by limited companies where there is a risk of bankruptcy) but many decisions have an aspect that can only be understood in terms of options (investments, analysis of credit risk, etc.). Option theory provides tools that not only allow to price optional components but also to manage portfolios of assets and liabilities that may include them. By greatly improving our understanding of financial mechanisms and risk management, option theory has significantly contributed to the increase in activity on financial markets.

Suggested Citation

  • Patrice Poncet & Roland Portait, 2022. "Options (I): General Description, Parity Relations, Basic Concepts, and Valuation Using the Binomial Model," Springer Texts in Business and Economics, in: Capital Market Finance, chapter 10, pages 353-397, Springer.
    • Handle: RePEc:spr:sptchp:978-3-030-84600-8_10
    DOI: 10.1007/978-3-030-84600-8_10
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