Models of Option´s Valuation and their Testing at CBOE
|Author:||Mgr. Jan Filáček|
|Year:||1998 - winter|
|Work type:|| Financial Markets
|Awards and prizes:|
|Abstract:||Upswing in the option and other derivatives markets in the last two decades evidences that they have an important position in the financial market structure in developed economies. Lowering investors` risks, smoother and easier portfolio diversification, market stabilization and deepening the market liquidity are the most visible impacts of well-functioning option market. In this context it is evident that if the Czech capital market aims to succeed in the competition of other European markets, it has to incorporate option market in its structure. The main specific of the option market is well-informed dealers and market makers, including their thorough knowledge of underlying theoretical concepts of option valuation.
The aim of this paper is to provide short and transparent survey of existing valuation methods, including both the "traditional" models (binomial model, Black-Scholes model, Merton model) and the less known models (jump diffusion model, stochastic volatility model).
In the first part of the paper I introduce the basic option terminology and briefly describe the option markets. The second part provides the reader with the selected option valuation methods. The first three "traditional" methods are derived, the derivation of other two is only indicated. The final pert of the paper is denoted to the empirical analysis of the models accuracy using the data from Chicago Board of Exchange between years 1996 and 1998.
Keywords: Option valuation, Black-Scholes model, Merton model, binomial model, jump diffusion model, stochastic volatility model
JEL classification: G13, G14, G15
|Downloadable:|| Diploma Thesis - Filáček