Basic Option Pricing, analytical solutions.

The pricing of options and related instruments has been a major breakthrough for the use of financial theory in practical application. Since the original papers of Black and Scholes (1973) and Merton (1973), there has been a wealth of practical and theoretical applications. In this chapter we will discuss ways of calculating the price of an option in the setting discussed in these original papers. The discussion is not complete, it needs to be supplemented by one of the standard textbooks, like Hull (1993).