1. Introducing Option Pricing Binomial Pricing in discrete times Transition to Continuous time BSOPM

2. Simple Heuristics on the Black-Scholes Option Pricing Model Rossitsa Yalamova University of Lethbridge

3. Objective and Goal Develop passion for creative solution and intuition of the variables relationships in the model Develop instructional design and educational technology for the foundations of derivative valuation and the basic principles of risk management and hedging.

4. Problem Solving Algorithms do not necessarily lead to comprehension but promise a solution, while heuristics are understood but do not always guarantee solutions. PDE for the solution of the BSOPM

5. Visualization heuristics Graphs, drawings and other visualization tools meet specific learning needs.

6. Discounted Cash flow Valuation European option pays only at expiration=S-K

7. Log Returns and call intrinsic value Continuous Compounding/Discounting Discrete vs. Continuous return

8. Review of Probability and Return Calculations Lognormal prices Return Probability calculations

9. Stock price at expiration? Crystal bowl or probability

10. The Black-Scholes model:

11. Concrete example technique Option at the money (S=K) risk free rate is 0:

12. Option at the money (S=K); R=0

13. (S=K); risk free rate positive Risk free rate moves the area to the right by and increases the value as K is discounted

14. Adding positive instantaneous return (S>K) The moves to the right by

15. Option “out-of-the-money”; r=0 The area moves to the left by

16. Option “out-of-the-money”; r>0