Black–Scholes Robert C. Merton was the first to publish a paper expanding the mathematical understanding of the options pricing model, and coined the term "Black–Scholes options pricing model". Merton and Scholes received the 1997 Nobel Prize in Economics (The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel) for their work. Though ineligible for the prize because of his death in 1995, Black was mentioned as a contributor by the Swedish Academy.[4] The model's assumptions have been relaxed and generalized in a variety of directions, leading to a plethora of models which are currently used in derivative pricing and risk management. The Black-Scholes world[edit] The Black–Scholes model assumes that the market consists of at least one risky asset, usually called the stock, and one riskless asset, usually called the money market, cash, or bond. Now we make assumptions on the assets (which explain their names): Assumptions on the market: Notation[edit] Let , the strike price of the option.
Weather derivative Overview of uses[edit] Heating degree days are one of the most common types of weather derivative. Typical terms for an HDD contract could be: for the November to March period, for each day where the temperature rises above 18 degrees Celsius keep a cumulative count of the difference between 18 degrees and the average daily temperature. Depending upon whether the option is a put option or a call option, pay out a set amount per heating degree day that the actual count differs from the strike. History[edit] The first weather derivative deal was in July 1996 when Aquila Energy structured a dual-commodity hedge for Consolidated Edison Co.[1] The transaction involved ConEd's purchase of electric power from Aquila for the month of August. After that humble beginning, weather derivatives slowly began trading over-the-counter in 1997. Valuation[edit] Business pricing[edit] Historical pricing (Burn analysis)[edit] The historical payout of the derivative is computed to find the expectation.
Getting To Know The "Greeks" An option's price can be influenced by a number of factors. These factors can either help or hurt traders, depending on the type of options positions they have established. To become a successful option trader, it is essential to understand what factors influence the price of an option, which requires learning about the so-called "Greeks" - a set of risk measures that indicate how exposed an option is to time-value decay, implied volatility and changes in the underlying price of the commodity. In this article, I we'll look at four "Greek" risk measures - delta, theta, vega and gamma - and explain their importance. But first, let's review some related option characteristics that will help you better understand the Greeks. SEE: Options Basics Tutorial Influences on an Option's Price Figure 1 lists the major influences on both a call and put option's price. Bear in mind that results will differ depending on whether you long or short an option. Three things to keep in mind with delta: 1. 1.
Nadex History[edit] "Hedgelets" come in two varieties: binary options and capped futures.[4] Binary options are bets on outcomes, "yes/no" contracts, that pay out a small dollar amount (e.g. $100) if final price of an instrument is above the strike price and nothing if below. For instance, HedgeStreet launched Germany 30 Binary Options in 2008. The Germany 30 contract is based on the DAX Equity Index Futures; if the estimate exceeds the strike price, the binary options pay out. A binary option is a contract with an all-or-nothing payout. As of mid-2006, the company had two major investment partners.[2] The Chicago Board Options Exchange purchased a minority stake in HedgeStreet in February 2006 and assists in marketing the company's "hedgelets". In 2007, UK based IG Group announced intent to acquire HedgeStreet[5][6] and later in the year completed the purchase of the company. Soon after the acquisition, IG Group renamed HedgeStreet to the North American Derivatives Exchange (Nadex).
Greeks (finance) The Greeks are vital tools in risk management. Each Greek measures the sensitivity of the value of a portfolio to a small change in a given underlying parameter, so that component risks may be treated in isolation, and the portfolio rebalanced accordingly to achieve a desired exposure; see for example delta hedging. , measures the rate of change of option value with respect to changes in the underlying asset's price. of the option with respect to the underlying instrument's price For a vanilla option, delta will be a number between 0.0 and 1.0 for a long call (or a short put) and 0.0 and −1.0 for a long put (or a short call); depending on price, a call option behaves as if one owns 1 share of the underlying stock (if deep in the money), or owns nothing (if far out of the money), or something in between, and conversely for a put option. These numbers are commonly presented as a percentage of the total number of shares represented by the option contract(s). ). The symbol kappa, Lambda,
Iowa Electronic Markets Iowa Electronic Market for 2008 Democratic National Primary. The Obama spike in February is a result of Super Tuesday. The Iowa Electronic Markets (IEM) are a group of real-money prediction markets/futures markets operated by the University of Iowa Tippie College of Business. Unlike normal futures markets, the IEM is not-for-profit; the markets are run for educational and research purposes. The IEM allows traders to buy and sell contracts based on, among other things, political election results and economic indicators. The IEM has often been used to predict the results of political elections with a greater accuracy than traditional polls.[1][2][3][4] A precursor to the IEM was the Iowa Political Stock Market (IPSM), invented by George Neumann, and was developed by Robert E. How it works[edit] Here are examples of contracts that the IEM traded, beginning June 6, 2006, concerning the 2008 U.S. On the first trading day in January, 2007, the DEM08_WTA contract sold for 52.2 cents.
Position (finance) The term "position" is also used in the context of finance for the amount of securities or commodities held by a person, firm, or institution, and for the ownership status of a person's or institution's investments. Net position is the difference between total open long (receivable) and open short (payable) positions in a given asset (security, foreign exchange currency, commodity, etc.) held by an individual. This also refers to the amount of assets held by a person, firm, or financial institution, as well as the ownership status of a person's or institution's investments. Stock valuation In financial markets, stock valuation is the method of calculating theoretical values of companies and their stocks. The main use of these methods is to predict future market prices, or more generally, potential market prices, and thus to profit from price movement – stocks that are judged undervalued (with respect to their theoretical value) are bought, while stocks that are judged overvalued are sold, in the expectation that undervalued stocks will, on the whole, rise in value, while overvalued stocks will, on the whole, fall. In the view of others, such as John Maynard Keynes, stock valuation is not a prediction but a convention, which serves to facilitate investment and ensure that stocks are liquid, despite being underpinned by an illiquid business and its illiquid investments, such as factories. Fundamental criteria (fair value)[edit] Stock valuation methods[edit] Stocks have two types of valuations. The fundamental valuation is the valuation that people use to justify stock prices.
Warren Buffett: How He Does It It's not surprising that Warren Buffett's investment strategy has reached mythical proportions. A $8,175 investment in Berkshire Hathaway (NYSE:BRK.A) in January 1990 was worth more than $165,000 by September 2013, while $8,175 in the S&P 500 would have grown to $42,000 within the aforementioned timeframe. But how did Buffett do it? Below are the most important tenets of Buffett's investment philosophy. Buffett's Philosophy Warren Buffett follows the Benjamin Graham school of value investing. Warren Buffett takes this value investing approach to another level. He chooses stocks solely based on their overall potential as a company - he looks at each as a whole. Buffett's Methodology Here we look at how Buffett finds low-priced value by asking himself some questions when he evaluates the relationship between a stock's level of excellence and its price. 1. Looking at the ROE in just the last year isn't enough. 2. 3. 4. 5. 6.
Arbitrage Arbitrage-free[edit] Conditions for arbitrage[edit] Arbitrage is possible when one of three conditions is met: Arbitrage is not simply the act of buying a product in one market and selling it in another for a higher price at some later time. In the simplest example, any good sold in one market should sell for the same price in another. See rational pricing, particularly arbitrage mechanics, for further discussion. Mathematically it is defined as follows: where and denotes the portfolio value at time t. Examples[edit] Price convergence[edit] Arbitrage has the effect of causing prices in different markets to converge. In reality, most assets exhibit some difference between countries. Risks[edit] In the academic literature, the idea that seemingly very low risk arbitrage trades might not be fully exploited because of these risk factors and other considerations is often referred to as limits to arbitrage.[1][2][3] Execution risk[edit] In the 1980s, risk arbitrage was common. Mismatch[edit]