OPTION VALUE CALCULATION AFFECTED COMPONENTS

Abstract

As the subprime credit crisis has attracted attention to financial derivative instruments, more frequently arises questions about fair value calculations. Over the time, different models had been introduced. All of those models take into account factors affecting prices. Mostly, factors used in calculations on the same type of financial instruments are approximately the same. Therefore question arises, which factor affects price more and which less, with no matter which model would be used for fair value calculations. One of financial derivative instrument types is options. Options are agreements, which give to option buyer rights to buy or sell underlying asset. While the seller or writer of option has obligation to buy or sell underlying asset. This research aims to explore the impact of factors on option fair value calculations and evaluate most important ones from those, which could be chosen by option buyer or seller. To reach the aim of research following tasks are developed: 1) review of fair value calculation models; 2) compare results of usage of different models and changes in affecting factors; 3) highlight differences between option price affecting factors, models used in calculations and results provided. Research includes literature review and analysis of option pricing results. Option price calculations are based on historical option prices, using black-Scholes and Binomial option pricing models.