Distribution of Payoffs of Simple Options
1. Context
In this short video, we explore the distribution of option payoffs for simple options like calls and puts and for contracts like forwards, given the distribution of the driver of their payoffs – the stock price. This option payoff distribution comes in handy when deriving the value of these options via discounted expectations – something which Black Scholes formula derivation does. It also exposes us to random variables that are neither discrete nor continuous. The details of the reading in which this topic appears are given below:
| Area | Quantitative Analysis, Valuation and Risk Models |
| Reading | Distributions |
| Reference | Michael Miller, Chapter 4. Distributions In Mathematics and Statistics for Financial Risk Management, 2nd Edition, (Hoboken, NJ: John Wiley & Sons, 2013). |