A Beginner’s Guide to Credit Default Swaps (Part 3)

Introduction Part 1 of this series of articles described the basic mechanics of a credit default swap. Part 2 started to describe some of the changes in the market since part 1 was written.  This part will continue that description by describing the upfront fee that is now paid on a standard CDS contract, and … Continue reading A Beginner’s Guide to Credit Default Swaps (Part 3)

A Beginner’s Guide to the Black-Scholes Option Pricing Formula (Part 3)

Continued from part 2. Volatility If you know a little about options already you will probably be aware that their values depend on something called volatility. Volatility is usually not needed to price derivatives that are not options. Technically volatility is defined as the annualized standard deviation of the return on an asset (in our … Continue reading A Beginner’s Guide to the Black-Scholes Option Pricing Formula (Part 3)

A Beginner’s Guide to the Black-Scholes Option Pricing Formula (Part 2)

Continued from part 1. Expected Value Suppose there’s a competition I can enter for free where I have a 50% chance of winning $1,000,000, and a 50% chance of receiving nothing. Obviously I’m going to enter as many times as possible. Suppose I enter 1,000 times: what will I expect to win? On average I’m … Continue reading A Beginner’s Guide to the Black-Scholes Option Pricing Formula (Part 2)

A Beginner’s Guide to the Black-Scholes Option Pricing Formula (Part 1)

Preface Firstly let me apologize to the .NET developers perusing this blog, as this article is a little off-topic. However, my interests range over both .NET and derivatives, and I will be posting on both topics in the future. Introduction The Black-Scholes model for pricing stock options was developed by Fischer Black, Myron Scholes and … Continue reading A Beginner’s Guide to the Black-Scholes Option Pricing Formula (Part 1)