Lecture 8: Derivatives II: Currency and interest rate options - PowerPoint PPT Presentation

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Lecture 8: Derivatives II: Currency and interest rate options

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[From Lecture 7] Current trends: [A very rough view] Volatility up, down and the reasons? Term structure of interest rates. Currency premium? How to reduce volatility? ... – PowerPoint PPT presentation

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Title: Lecture 8: Derivatives II: Currency and interest rate options


1
Lecture 8 Derivatives II Currency and interest
rate options
  • Galina A Schwartz
  • Department of Finance
  • University of Michigan
  • Business School

2
Plan of todays lecture
  • Chapter 12, Levich
  • Why options?
  • Major players terminology
  • Option pricing is it exact science?
  • Black-Scholes option pricing model
  • Its features deficiencies
  • Future of options
  • Summary

3
Why do we observe options?
  • Future contract symmetric payoff profile
  • Options nonsymmetrical payoff
  • Options are redundant securities
  • Options
  • -- currency
  • -- interest rate
  • Players PHLX, CME, SIMEX, etc.
  • Terminology call, put, American, European

4
Black-Scholes option pricing model
  • Continuous time lognormal approach
  • Underlying constants
  • From Lecture 7 Current trends
  • A very rough view
  • Volatility up, down and the reasons?
  • Term structure of interest rates
  • Currency premium?
  • How to reduce volatility?
  • -- Improve efficiency
  • -- Impose regulation

5
Summary
  • Option contracts
  • price uncertainty before maturity
  • Option market efficiency
  • Is B-S model correct?
  • Are B-S assumptions false?

6
What is next Lecture 10
  • Monday, November 27, 2000
  • Derivatives III, Chapter 13, Levich
  • Have a Happy Thanksgiving!!!
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