What are derivative price models?

Derivative price models are techniques used by investors to try to find an objective rate of actual derivative value. This is then compared to the real market price to see if it is a worthy investment. Each model takes into account different known factors that affect the derivative. While the derivative price models work in an objective way, the selection of the factors to which this model is related to it is subjective.

The derivative is a financial agreement based on the basic asset. In most cases, this agreement is based on a transaction that will take place at the future date involving asset, but with the price set in advance. The difference between the agreed price for the transaction and the actual market price of the underlying asset at the time of the transaction usually determines which party in the agreement makes profits. Examples of derivatives include Futures agreements, options agreements and swaps. Once an agreement on the derivative has been concluded, the parties may include its share known as trading in the contract. One of theThe way to do this is the use of derivative price models. These attempts to find out what the "fair" price for the derivative at present. This can then be compared with the current market price of the derivative, which is determined by demand and supply.

One of the most famous models of derivative prizes is the Black-Scholes Awards. This takes six factors into account. These factors are: How long the derivative has to run before the transaction date, the current price of the underlying asset, the fixed transaction price under the derivative, the dividends investor is missing by purchasing a derivative rather than a tsamný asset, interest saved by not having to pay for the basic asset immediately and volatility.

While the concept of the model is relatively simple, mathematics used to produce calculation is relatively detailed and the creation of a graph showing the extent of potential "fair" prices includes a three -dimensional graph. FortunatelyPrograms make it easier to calculate values ​​using derivative price models. Such programs also allow variations on models, whether it means switching to a brand new model, or to tune the existing model to make more emphasis on an individual factor.

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