ABSTRACT
This chapter discusses pricing options in more detail. It explains the different types of option pricing models and their objectives. There are several kinds of option pricing models. For any underlying asset price process that itself does not admit arbitrage opportunities, it asserts that there must be some intuitive, obvious relationships between options and their underlying instruments. It is important to understand the difference between directional trades and relative trades because the possibility of financial disaster is, in part, based on the distinction. A positive current cost is recorded as a positive number. A negative current cost is a benefit, or a reduction, in positive current costs, and is recorded as a negative number. The European option pricing model can be be interpreted in terms of the rights associated with relative risks, in perfect analogy with the rights interpretation option for the American case.
