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Python for Finance

You're reading from   Python for Finance Apply powerful finance models and quantitative analysis with Python

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Product type Paperback
Published in Jun 2017
Publisher
ISBN-13 9781787125698
Length 586 pages
Edition 2nd Edition
Languages
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Author (1):
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Yuxing Yan Yuxing Yan
Author Profile Icon Yuxing Yan
Yuxing Yan
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Toc

Table of Contents (17) Chapters Close

Preface 1. Python Basics FREE CHAPTER 2. Introduction to Python Modules 3. Time Value of Money 4. Sources of Data 5. Bond and Stock Valuation 6. Capital Asset Pricing Model 7. Multifactor Models and Performance Measures 8. Time-Series Analysis 9. Portfolio Theory 10. Options and Futures 11. Value at Risk 12. Monte Carlo Simulation 13. Credit Risk Analysis 14. Exotic Options 15. Volatility, Implied Volatility, ARCH, and GARCH Index

Pricing average options

In Chapter 12, Monte Carlo Simulation, we discussed two exotic options. For convenience, we will include them in this chapter as well. Because of this, readers will find some duplicates. European and American options are path-independent options. This means that an option's payoff depends only on the terminal stock price and strike price. One related issue for path-dependent options is market manipulation at the maturity date. Another issue is that some investors or hedgers might care more about the average price instead of a terminal price.

For example, a refinery is worried about oil, its major raw material, and price movement in the next three months. They plan to hedge the potential price jumps in crude oil. The company could buy a call option. However, since the firm consumes a huge amount of crude oil every day, naturally it cares more about the average price instead of just the terminal price on which a vanilla call option depends. For such cases, average...

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