Forward Options

The relation between spot and forward price is given by And, when this investment provide average dividend yield at rate q per annum, then Hence, replacing in Merton formula for stock paying a dividend yield q, we obtain European call and put prices for forwards paying a dividend yield at rate q per annum Where

European option with dividend yield

European option with dividend yield (Merton’s Formula) The vales of European call and put options for a stock paying a dividend yield at rate q were first derived by R.C. Merton 1973 and can be given by replacing So with Soe−qT in the Black-Schloes-Merton formula for European style call and put. Thus the formula for […]

European Option with Dividend

European options with a known dividend can be valued by, first subtracting present value of dividends from the current stock price. And, then using Black-Scholes-Merton formula for call/put using this new stock price.

European Option

A European option is a contract which gives the holder the right to buy or sell the underlying asset for an agreed price on expiry. European options can only be exercised on date of expiry. European Call Option A European call option is a contract which gives the holder the right to buy the underlying […]

Option payoff

Suppose on 1 March 2015 you buy an option to purchase 1 million barrel of oil for $80 per barrel on 1 July 2015. If on 1 July 2015 the market price of oil is $78 per barrel you definitely will not use your option, and will purchase oil on market price. But, if on […]

Position in Options

A businessman can: Buy a call option Sell a call option Buy a put option Sell a put option Buyers are referred to assumes a long position, and sellers are referred to assumes short position. For example, if an investor has bought a call option then it is said that the investor has assumed a […]


An option is a contract which gives the holder the right to buy or sell an asset by a certain date for an agreed price. Unlike forward contracts, the options are rights and not obligations. The agreed price is called exercise price (or strike price or simply strike), the date is called expiry date (or […]


A swap is an agreement between counter parties to exchange one asset for another. For example They can enter a swap contract to carry out their businesses. Currency Swaps One of the most popular types of swap is known as currency swap. In its simplest form, it involves the exchange of principle and interest payments. […]

Futures exchange

Futures are traded in organized futures exchanges (also called futures markets). Futures exchanges are electronic exchange markets where producers and consumers of different commodities make future contracts. Mostly, it is used to hedge the risk from the price exchanges. It is also used by speculators who wants to make profit from the price changes. The […]

Over-the-Counter Market

Forwards are traded in the over-the-counter market. It is a telephone and computer-linked network of dealers without a central physical location. The two parties (or financial institutions) negotiate to reach an agreement. Their conversation is usually taped to avoid any ambiguity. Different clients also work for different companies who makes deals for one company with […]