Theory and practice of option pricing 2400-QFU2TPRO
The detailed content of the course is presented below.
• Review of option pricing
• Theory and practice of dynamic replication: implied and realized volatility
• P&L of a delta-hedged portfolio
• Practical limitations of replication: transaction costs and discrete time steps
• Volatility smile – causes and consequences
• Volatility smile and pricing vanilla and exotic options
• Calibration and model risk
• Pricing models accounting for volatility smile
Type of course
Upon completion of the course the student:
- knows how to price call and put options within the Black-Scholes framework, and understands the main assumptions underlying the theory
- knows basic conventions used in option markets, as well as knows and understands the concept of implied volatility
- correctly identifies the main risk factors underlying investment in options
- knows how to analyze theoretically and model quantitatively the results of the main option trading strategies, including dynamic hedging/replication
- is familiar with the main numerical techniques used for pricing and analyzing options (Monte Carlo simulation, finite different schemes)
KW01, KW02, KU01, KU02
Zasady zaliczenia: egzamin pisemny na zakończenie kursu (75%), zadanie domowe (25%)
Derman, E.; I. Kani (1994): “Riding on a smile”, Risk, 7, 32-39.
Derman, E.; N.N. Taleb (2005): The illusions of dynamic replication, Quantitative Finance, Vol. 5, No. 4, August 2005, 323–326.
Dupire, B. (1993): “Pricing and hedging with smiles”, Discussion paper, Paribas Capital
Gatheral, J. (2006): The Volatility Surface - A Practitioner's Guide. John Wiley & Sons Ltd.
Haug, E.G. oraz N.N. Taleb (2011): Option Traders Use (very) Sophisticated Heuristics, Never the Black–Scholes–Merton Formula, Journal of Economic Behavior and Organization, Vol. 77, No. 2, 2011.
Hull, J. C. (2008): Options, Futures & Other Derivatives. Prentice Hall, 7 edn.
Neftci, S. N. (2008): Principles of Financial Engineering. Elsevier.
Sinclair, E. (2008): Volatility Trading. Wiley Trading.
Taleb, N.N. (1997): Dynamic Hedging: Managing Vanilla and Exotic Options, Wiley
Wilmott, P. (2006): Paul Wilmott On Quantitative Finance. John Wiley & Sons Ltd.
Information on level of this course, year of study and semester when the course unit is delivered, types and amount of class hours - can be found in course structure diagrams of apropriate study programmes. This course is related to the following study programmes:
Additional information (registration calendar, class conductors, localization and schedules of classes), might be available in the USOSweb system: