ABSTRACT
We see in this chapter that call (put) options are financial instruments that allow their holder to sell (buy) something at some future moment and at some prefixed price. Options that can be exercised only at maturity are called European, while if they can be exercised at any time before maturity they are called American. European and American options are the simplest examples of options, an we refer to them as vanillas. Options that are not vanillas are called exotics, and they include barrier, lookback and barrier options. Vanilla option prices are observed in the market and they strongly depend on several parameters as asset price, interest rate of volatility, as well as on strike and time to maturity. Moreover, option prices have to satisfy the call-put parity, a relationship between the price of a European call and the price of the corresponding European put. Finally, we see how we can use options to construct more complex strategies as bull or bear spread.
