Chapter 10: Pricing and Valuation of Options

In this section

• Determinants of Option Value
  Determinants of Option Value (CFA Level 1): Payoff Asymmetry, Intrinsic Value and Time Value, and How Intrinsic and Time Value Evolve. Key definitions, formulas, and exam tips.
• Put–Call Parity and Put–Call Forward Parity
  Put–Call Parity and Put–Call Forward Parity (CFA Level 1): Core Principles of No-Arbitrage, Understanding the Basic Put–Call Parity for European Options, and Breaking It Down. Key definitions, formulas, and exam tips.
• Binomial Option Pricing Model (One-Period)
  Binomial Option Pricing Model (One-Period) (CFA Level 1): Test Your Knowledge: One-Period Binomial Option Pricing, call option's payoff in an up state, and Which of the following best describes why the. Key definitions, formulas, and exam tips.
• Risk-Neutral Valuation
  Risk-Neutral Valuation (CFA Level 1): Core Idea of a Risk-Neutral World, Real-World Probability vs. Risk-Neutral Probability, and Arbitrage-Free Pricing and Replication. Key definitions, formulas, and exam tips.
• Black–Scholes–Merton Model Assumptions
  Black–Scholes–Merton Model Assumptions (CFA Level 1): Key Assumptions of the BSM Model, Frictionless Markets and Continuous Trading, and Underlying Follows Geometric Brownian Motion. Key definitions, formulas, and exam tips.
• Dividends in Option Pricing
  Dividends in Option Pricing (CFA Level 1): Impact of Dividends on Calls and Puts, Approaches to Modeling Dividends, and Discrete Dividend Approach. Key definitions, formulas, and exam tips.
• Introduction to the Black–Scholes–Merton Model
  Introduction to the Black–Scholes–Merton Model (CFA Level 1): Roots of the Black–Scholes–Merton Model, Core Formula, and Risk-Neutral Interpretation. Key definitions, formulas, and exam tips.
• Option Sensitivities (Greeks)
  Option Sensitivities (Greeks) (CFA Level 1): Fundamentals of Option Sensitivities, Delta (∆), and Definition and Interpretation. Key definitions, formulas, and exam tips.
• Volatility Smiles and the Implied Volatility Surface
  Volatility Smiles and the Implied Volatility Surface (CFA Level 1): Revisiting Implied Volatility, Volatility Skew and Smile, and Shape. Key definitions, formulas, and exam tips.
• Variance and Volatility Swaps
  Variance and Volatility Swaps (CFA Level 1): Distinguishing Variance and Volatility Swaps, Motivations for Using Variance and Volatility Swaps, and How These Swaps Work. Key definitions, formulas, and exam tips.
• Monte Carlo Methods for Complex Option Pricing
  Monte Carlo Methods for Complex Option Pricing (CFA Level 1): Why Monte Carlo for Complex Option Pricing?, Key Steps in Monte Carlo Simulation, and Step 1: Model the Underlying Price Dynamics. Key definitions, formulas, and exam tips.
• Multi-Period Binomial Trees for American Options
  Multi-Period Binomial Trees for American Options (CFA Level 1): Core Concepts and Recap, American-Style vs European-Style, and Multi-Period Binomial Trees. Key definitions, formulas, and exam tips.
• Finite Difference Methods in Option Pricing
  Finite Difference Methods in Option Pricing (CFA Level 1): Discretizing the Domain and Grid Layout. Exam-focused explanations with key terms and takeaways.
• Early Exercise Considerations in American-Style Options
  Early Exercise Considerations in American-Style Options (CFA Level 1): Why or Why Not Exercise Early?, American Calls on Non-Dividend-Paying Stocks, and American Calls on Dividend-Paying Stocks. Key definitions, formulas, and exam tips.
• Static Replication Approaches for Barrier Options
  Static Replication Approaches for Barrier Options (CFA Level 1): Essence of Static Replication, Key Principles, and Constructing the Static Replication Portfolio. Key definitions, formulas, and exam tips.
• Machine Learning Approaches in Option Pricing
  Machine Learning Approaches in Option Pricing (CFA Level 1): Rationale for Machine Learning in Option Pricing, Supervised Learning Framework, and Data Requirements and Strategies. Key definitions, formulas, and exam tips.
• Options on Implied Volatility
  Options on Implied Volatility (CFA Level 1): Defining Options on Implied Volatility, Why Focus on Implied Volatility?, and Closer Look at VIX and VIX Options. Key definitions, formulas, and exam tips.
• Jump-Diffusion Models in Option Pricing
  Jump-Diffusion Models in Option Pricing (CFA Level 1): Conceptual Underpinnings of Jump-Diffusion, Poisson Process for Jumps, and Merton’s Jump-Diffusion Model. Key definitions, formulas, and exam tips.
• Stochastic Volatility and Heston Model
  Stochastic Volatility and Heston Model (CFA Level 1): Key Distinctions from the Constant Volatility World, Heston Model in Depth, and Mean Reversion in Volatility. Key definitions, formulas, and exam tips.