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4.1 Plain vanilla stock options

Following a rather descriptive chapter 2 where the terminal payoff of an option was only defined on the expiry date, increasingly sophisticated methods have been introduced in the previous chapter 3 to calculate the fair value of an option before it expires. Using these tools, we about to explore how the price of a financial derivative evolves with time. Rather than limiting the analysis to simplistic models or restricting the audience to so-called ``rocket scientists'', we will take advantage here of numerical experiments that can be performed using the VMARKET applet : your task will be to run the simulations, edit the parameters and analyze the output to develop your intuition, using the same methods that are used by the professionals. The second part of this chapter is more advanced and deals with the implementation of financial models using both analytic and numerical methods.