ABSTRACT
This chapter shows how the simple assumption of no-arbitrage may be used to derive fundamental properties regarding the value of a derivative. It presents an example on the assertion that shows how the assumption of no-arbitrage has concrete mathematical consequences. The result will play a fundamental role in the pricing of derivatives in the binomial market model. The chapter examines various common types of derivatives. It presents an analysis with the simplest types of European path-independent derivatives: forwards and futures. The chapter illustrates how dividends can affect option properties by proving a version of the put-call parity formula for dividend-paying stocks. The holder of a floating strike lookback call option has the right at maturity to buy the stock for its lowest value over the duration of the contract, while the holder of a floating strike lookback put option may sell the stock at its high.
