Methodologies
Derivatives Methodology
8 min
derivatives methodology overview this document outlines the methodology implemented for pricing and risk assessment of derivative instruments in the mantarisk platform supported derivative types the platform currently supports the following derivative types vanilla options (calls and puts) exercise types the following exercise styles are supported european exercise can only be exercised at maturity american exercise can be exercised at any time up to maturity pricing methodology the derivatives module uses the black scholes model for pricing options the implementation supports european and american options key parameters for option pricing underlying price current price of the underlying asset strike price the price at which the option holder can buy (call) or sell (put) the underlying asset maturity date the date when the option expires volatility the volatility of the underlying asset, used to estimate price fluctuations risk free rate the theoretical rate of return of an investment with zero risk scenario generation the platform generates price scenarios for derivatives based on the underlying asset's price scenarios this is done through the following process for each scenario of the underlying asset price, the corresponding derivative price is calculated using the black scholes model returns are calculated based on these price scenarios currency conversion is applied if the derivative is denominated in a different currency than the base currency this approach allows for consistent risk assessment across different types of instruments in a portfolio risk assessment risk metrics for derivatives are calculated based on the generated price scenarios the platform uses the same risk assessment framework for derivatives as for other instruments, ensuring consistency in risk evaluation across the portfolio references the implementation is based on established financial models and methodologies black scholes model for option pricing barone adesi and whaley approximation for american options scenario based risk assessment as described in this paper https //drops dagstuhl de/storage/01oasics/oasics vol050 scor2016/oasics scor 2016 9/oasics scor 2016 9 pdf