Valuation of Options - Pricing Models

Pricing Models

Because the values of option contracts depend on a number of different variables in addition to the value of the underlying asset, they are complex to value. There are many pricing models in use, although all essentially incorporate the concepts of rational pricing, Moneyness, Option time value and Put-call parity.

Amongst the most common models are:

• Black–Scholes and the Black model
• Binomial options pricing model
• Monte Carlo option model
• Finite difference methods for option pricing

Other approaches include:

• Heston model
• Heath-Jarrow-Morton framework
• Variance Gamma Model (see variance gamma process)