Hedging your bets in a volatile world: an introduction to the use and pricing of European call options.

Abstract

In recent years, our economy and livelihoods have been affected by the volatility of financial markets. We have seen how banks and investors have failed to control and understand their risks. In this article, I outline one of the fundamental tools used to control exposure to risk in financial markets. In doing so, I explore some of the underlying assumptions of mathematical models used in the financial industry today and show how my research attempts to make these assumptions more realistic while keeping the model simple. As well as the trading of stocks and shares, many of the transactions in financial markets consist of the trading of contracts. Such a contract may be an agreement between two parties on the price of a stock, the quantity and time of delivery of some commodity, or contracts that provide insurance for investors. My research is concerned with determining the value of one ...