**Are you an EPFL student looking for a semester project?**

Work with us on data science and visualisation projects, and deploy your project as an app on top of GraphSearch.

Lecture# Principles of Finance: Options in Corporate Finance

Description

This lecture covers the principles of finance with a focus on options in corporate finance. Topics include graphical representations of call options, profits from holding options to expiration, portfolio insurance, assumptions and notations in finance, call-put parity, early exercise of options, option pricing, replicating portfolios, the binomial model for option pricing, estimating volatility, and pricing American puts. The lecture also delves into the dynamics of stock prices, pricing options maturing in the next period, and solving option pricing models recursively.

Official source

This page is automatically generated and may contain information that is not correct, complete, up-to-date, or relevant to your search query. The same applies to every other page on this website. Please make sure to verify the information with EPFL's official sources.

In course

Instructor

Related concepts (37)

MGT-482: Principles of finance

The course provides a market-oriented framework for analyzing the major financial decisions made by firms. It provides an introduction to valuation techniques, investment decisions, asset valuation, f

In finance, a put or put option is a derivative instrument in financial markets that gives the holder (i.e. the purchaser of the put option) the right to sell an asset (the underlying), at a specified price (the strike), by (or on) a specified date (the expiry or maturity) to the writer (i.e. seller) of the put. The purchase of a put option is interpreted as a negative sentiment about the future value of the underlying stock. The term "put" comes from the fact that the owner has the right to "put up for sale" the stock or index.

A binary option is a financial exotic option in which the payoff is either some fixed monetary amount or nothing at all. The two main types of binary options are the cash-or-nothing binary option and the asset-or-nothing binary option. The former pays some fixed amount of cash if the option expires in-the-money while the latter pays the value of the underlying security. They are also called all-or-nothing options, digital options (more common in forex/interest rate markets), and fixed return options (FROs) (on the NYSE American).

In finance, an option is a contract which conveys to its owner, the holder, the right, but not the obligation, to buy or sell a specific quantity of an underlying asset or instrument at a specified strike price on or before a specified date, depending on the style of the option. Options are typically acquired by purchase, as a form of compensation, or as part of a complex financial transaction.

In finance, the style or family of an option is the class into which the option falls, usually defined by the dates on which the option may be exercised. The vast majority of options are either European or American (style) options. These options—as well as others where the payoff is calculated similarly—are referred to as "vanilla options". Options where the payoff is calculated differently are categorized as "exotic options". Exotic options can pose challenging problems in valuation and hedging.

In finance, the binomial options pricing model (BOPM) provides a generalizable numerical method for the valuation of options. Essentially, the model uses a "discrete-time" (lattice based) model of the varying price over time of the underlying financial instrument, addressing cases where the closed-form Black–Scholes formula is wanting. The binomial model was first proposed by William Sharpe in the 1978 edition of Investments (), and formalized by Cox, Ross and Rubinstein in 1979 and by Rendleman and Bartter in that same year.

Related lectures (53)

Options in Corporate FinanceMGT-482: Principles of finance

Introduces the principles of options in corporate finance, covering markets, terminology, valuation, and pricing models.

The Black-Scholes-Merton ModelFIN-404: Derivatives

Covers the Black-Scholes-Merton model, dynamics, self-financing strategies, and the PDE.

The Binomial ModelFIN-404: Derivatives

Covers the binomial model for asset pricing, including options pricing and convergence to the Black-Scholes model.

Financial Market Models: Arbitrage and Completeness

Explores arbitrage-free and complete financial market models, risk-neutral probabilities, structured notes pricing, and option hedging.

Portfolio Theory: Risk Parity StrategyFIN-405: Investments

Explores Portfolio Theory with a focus on the Risk Parity Strategy, discussing asset allocation proportional to the inverse of volatility and comparing different diversified portfolios.