Reading 29

Valuation of Contingent Claims

7 modules 37 min
0/7

Exam Focus

This topic review covers the valuation of options. Candidates need to be able to calculate value of an option using the binomial tree framework and should also understand the inputs into the Black Scholes model and how they influence the value of an option. While this topic review is somewhat quantitative, candidates need to understand the material conceptually as well.

This reading has a lot of testable material.

Modules

  1. Module 29.1The Binomial ModelDescribe and interpret the binomial option valuation model and its component terms. 路 Describe how the value of a European option can be analyzed as the present value of the option鈥檚 expected payoff at expiration. 路 Calculate the no arbitrage values of European and American options using a two period binomial model.4 min 路 3 LOS
  2. Module 29.2Two Period Binomial Model and Put Call Parity4 min
  3. Module 29.3American Options2 min
  4. Module 29.4Hedge RatioIdentify an arbitrage opportunity involving options and describe the related arbitrage.3 min 路 1 LOS
  5. Module 29.5Interest Rate OptionsCalculate and interpret the value of an interest rate option using a two period binomial model.2 min 路 1 LOS
  6. Module 29.6Black Scholes Merton and SwaptionsIdentify assumptions of the Black Scholes Merton option valuation model. 路 Interpret the components of the Black Scholes Merton model as applied to call options in terms of a leveraged position in the underlying. 路 Describe how the Black Scholes Merton model is used to value European options on equities and currencies. 路 Describe how the Black model is used to value European options on futures. 路 Describe how the Black model is used to value European interest rate options and European swaptions.10 min 路 5 LOS
  7. Module 29.7Option Greeks and Dynamic HedgingInterpret each of the option Greeks. 路 Describe how a delta hedge is executed. 路 Describe the role of gamma risk in options trading. 路 Define implied volatility and explain how it is used in options trading.12 min 路 4 LOS
Practice quiz16 questions on this reading