An option is a derivative of an asset that gives an owner the right but not the obligation to transact the underlying asset at a certain date for a certain price, known as the maturity date and strike price respectively.

A call option gives the buyer the right to buy an asset by a certain date for a certain price. A seller or writer of a call option is obligated to sell the underlying security to the buyer at the agreed price, should the buyer exercise his/her rights on the agreed date. A put option gives the buyer the right to sell the underlying asset by a certain date for a certain price. A seller or writer of a put option is obligated to buy the underlying security from the buyer at the agreed price, should the buyer exercise his/her rights on the agreed date.

The most common options available are the European options and American options. Other exotic options include Bermudan options and Asian options. This chapter will deal mainly with European and American...