Book Image

Python for Finance - Second Edition

By : Yuxing Yan
5 (1)
Book Image

Python for Finance - Second Edition

5 (1)
By: Yuxing Yan

Overview of this book

This book uses Python as its computational tool. Since Python is free, any school or organization can download and use it. This book is organized according to various finance subjects. In other words, the first edition focuses more on Python, while the second edition is truly trying to apply Python to finance. The book starts by explaining topics exclusively related to Python. Then we deal with critical parts of Python, explaining concepts such as time value of money stock and bond evaluations, capital asset pricing model, multi-factor models, time series analysis, portfolio theory, options and futures. This book will help us to learn or review the basics of quantitative finance and apply Python to solve various problems, such as estimating IBM’s market risk, running a Fama-French 3-factor, 5-factor, or Fama-French-Carhart 4 factor model, estimating the VaR of a 5-stock portfolio, estimating the optimal portfolio, and constructing the efficient frontier for a 20-stock portfolio with real-world stock, and with Monte Carlo Simulation. Later, we will also learn how to replicate the famous Black-Scholes-Merton option model and how to price exotic options such as the average price call option.
Table of Contents (23 chapters)
Python for Finance Second Edition
Credits
About the Author
About the Reviewers
www.PacktPub.com
Customer Feedback
Preface
Index

European versus American options


A European option can be exercised only on maturity day, while an American option can be exercised any time before or on its maturity day. Since an American option could be held until it matures, its price (option premium) should be higher than or equal to its European counterpart:

An import difference is that for a European option, we have a close form solution, that is, the Black-Scholes-Merton option model. However, we don't have a close-form solution for an American option. Fortunately, we have several ways to price an American option. Later in the chapter, we show how to use the Binomial-tree method, also called the CRR method, to price an American option.

Understanding cash flows, types of options, rights and obligations

We know that for each business contract, we have two sides: buyer versus seller. This is true for an option contract as well. A call buyer will pay upfront (cash output) to acquire a right. Since this is a zero-sum game, a call option...