Financial Derivatives Valuation: Stock Options.

		Project prepared by Dimitri Betelman on 12/1997

Introduction and Definitions.

A stock option is a right to buy or sell a particular stock at a certain \price for a limited period of time. The stock in question is called the \underlying security. A call option gives the owner (or holder) the right to \buy the underlying security, while a put option gives the holder the right to \sell the underlying security. The price at which the stock may be bought or \sold is the exercise price, also called  the striking price. 
	Four \specification uniquely describe any option contract:
	
	1. the type (put \or call),
	2. the underlying stock name,
	3. the expiration date,
	4. 	he striking price.
	
As an example, an option  referred to as an "XYZ \July 50 call" is an option to buy 100 shares of the underlying XYZ stock for \$50 per share. The option expires in July. 
	An option is a "wasting" \asset; that is it has only an initial value that declines as time passes. It \may even expire worthless, or the holder may have to exercise it in order to ecover some value before expiration. 
	An option is also a security by \itself, but it is a derivative security. The option is irrevocably linked to 	he underlying stock; its price fluctuates as the price of the underlying \stock rises or falls. An option's price is the result of properties of both 	he underlying stock and terms of the option. The major quantifiable factors \influencing the price of an option are the:
	
	1. price of the underlying \stock,
	2. striking price of the option itself,
	3. time remaining until \expiration of the option,
	4. volatility of the underlying stock,
	5. \current risk-free interest rate (such as for 90-day Treasury bills)

Pricing Model. Black-Scholes Formula.