Option Pricing Basics

 

Summary of topic

 

This page discusses option pricing models, which are useful background knowledge for actuaries pricing modern investment guarantees etc…

Those working on the topic

 

Declan Lavelle - declanlavelle@hld.ie

 

Getting Started

 

The theoretical underpinning of Modern Option Pricing is the work done by Black, Scholes and Merton in the early seventies

 

However in practice option pricing can easily be implemented in a spreadsheet (see Cox Ross and Rubinstein below)

 

Some Useful Option Pricing Resources

 

• Wikipedia Article on Option Pricing

 

• Summary of Option Pricing Models

 

• Seminal Paper on Option Pricing by Cox Ross and Rubinstein. See a simple excel implementation here.

 

• American Option Valuation: New Bounds, Approximations, and a Comparison of Existing Methods by Broadie and Detemple

 

• Some of the history about how option pricing has been used (and mis-used) is really well described in Infectious Greed, by Frank Partnoy.

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