Author(s)

Yi Zhong ¹

Affiliation(s)

¹ University of Leicester, Business College, University Rd, Leicester, LE17PA, UK

Corresponding Author

Yi Zhong

ABSTRACT

Options are an important tool in financial markets for managing and transmitting risk, while also providing investors with the opportunity to earn returns. This paper first introduces the basic concepts and characteristics of options, including the definition of an option, buyer and seller, strike price, and expiration date. Next, the differences between European and American options, and the characteristics of Asian and Brazilian options are discussed. Then, the development and extension of option valuation models, as well as their applicability and limitations, are discussed. In addition, the application and role of options in the financial markets are analyzed, as well as option trading strategies and practical examples. The risks and challenges of options trading are further discussed, as well as the concepts of speculation and arbitrage. Finally, suggestions and outlooks for options trading and risk management are presented, as well as an analysis of the current state of research and future trends in options valuation theory and applications.

KEYWORDS

Option trading, option valuation, risk management, arbitrage strategy, financial markets

CITE THIS PAPER

Yi Zhong, The evolution of option valuation theory and its application in practice. Financial Engineering and Risk Management (2023) Vol. 6: 12-18. DOI: http://dx.doi.org/10.23977/ferm.2023.060303.

REFERENCES

[1] Black F., & Scholes M. (1973). The pricing of options and corporate liabilities [J]. Journal of Political Economy, 81(3):637-654.
[2] Merton R. C. (1973). Theory of rational option pricing [J]. The Bell Journal of Economics and Management Science, 4(1):141-183.
[3] Li X. (2019). The valuation of American put option based on the method of fuzzy binomial tree [J]. Journal of Physics: Conference Series, 1238(1):012057.
[4] Mao C., & Shi J. (2019). Analysis on the risk management of options trading in China [J]. Journal of Physics: Conference Series, 1238(1):012012.
[5] Lu J., Wang W., & Yuan Q. (2020). Option pricing under the generalized hyperbolic distribution [J]. Physica A: Statistical Mechanics and its Applications, 540, 123197.
[6] Wu Y., Sun, C., & Zhou Y. (2020). Research on option pricing model based on improved grey wolf optimization algorithm [J]. Journal of Physics: Conference Series, 1597(1):012007.
[7] Wu G. P. (2016). Research on option price evaluation method [J]. Science and Technology Innovation and Productivity, 290(13):143-144.
[8] Xu J., & Xie W. (2017). A study on option market and option trading strategy [J]. Science and Technology Wind, 17(6):102-103.

Sponsors, Associates, and Links

---

• Information Systems and Economics
  
  
• Accounting, Auditing and Finance
  
  
• Industrial Engineering and Innovation Management
  
  
• Tourism Management and Technology Economy
  
  
• Journal of Computational and Financial Econometrics
  
  
• Accounting and Corporate Management
  
  
• Social Security and Administration Management
  
  
• Population, Resources & Environmental Economics
  
  
• Statistics & Quantitative Economics
  
  
• Agricultural & Forestry Economics and Management
  
  
• Social Medicine and Health Management
  
  
• Land Resource Management
  
  
• Information, Library and Archival Science
  
  
• Journal of Human Resource Development
  
  
• Manufacturing and Service Operations Management
  
  
• Operational Research and Cybernetics