Options engineering

1. Lecturer: AsHOT TSHARAKYAN, M.A., PH.D. Affiliation: moody’s Analytics

Irkutsk State University
Basics of Financial Engineering , Fall 20 16
Options engineering
LECTURER: ASHOT TSHARAKYAN, M.A.,
PH.D.
AFFILIATION: MOODY’S ANALYTICS

2. Lesson objectives

Introduce the concept of options and advantages of
options.
Review the mechanics option contracts
Evaluate cash flows , gains and losses associated with
options
Discuss example of hedging strategies.

3. Introduction

Option contracts give to it’s holder a right to buy or
sell underlying instrument at predefined price at some
future date.
Call option – a right to buy the underlying instrument
Put option – a right to sell the underlying instrument
Option contracts characterized by expiration date
and strike price. Options can be American or
European.

4. Example of option quotes table

Puts
Bid
Ask
Volume
Nov 55
0.9
1.05
202
Nov 60
2.3
2.55
5984
Nov 65
5
5.3
64
Dec 55
2.05
2.35
10
Expiration date : 3-rd Friday of each month

5. Pricing function of the call option

• The fair price of the call option at time t is function of a
price of underlying asset