Book Image

Python for Finance Cookbook

By : Eryk Lewinson
Book Image

Python for Finance Cookbook

By: Eryk Lewinson

Overview of this book

Python is one of the most popular programming languages used in the financial industry, with a huge set of accompanying libraries. In this book, you'll cover different ways of downloading financial data and preparing it for modeling. You'll calculate popular indicators used in technical analysis, such as Bollinger Bands, MACD, RSI, and backtest automatic trading strategies. Next, you'll cover time series analysis and models, such as exponential smoothing, ARIMA, and GARCH (including multivariate specifications), before exploring the popular CAPM and the Fama-French three-factor model. You'll then discover how to optimize asset allocation and use Monte Carlo simulations for tasks such as calculating the price of American options and estimating the Value at Risk (VaR). In later chapters, you'll work through an entire data science project in the financial domain. You'll also learn how to solve the credit card fraud and default problems using advanced classifiers such as random forest, XGBoost, LightGBM, and stacked models. You'll then be able to tune the hyperparameters of the models and handle class imbalance. Finally, you'll focus on learning how to use deep learning (PyTorch) for approaching financial tasks. By the end of this book, you’ll have learned how to effectively analyze financial data using a recipe-based approach.
Table of Contents (12 chapters)

Pricing European options using simulations

Options are a type of derivative instrument because their price is linked to the price of the underlying security, such as stock. Buying an options contract grants the right, but not the obligation, to buy or sell an underlying asset at a set price (known as a strike) on/before a certain date. The main reason for the popularity of options is because they hedge away exposure to an asset's price moving in an undesirable way.

A European call/put option gives us the right (but again, no obligation) to buy/sell a certain asset on a certain expiry date (commonly denoted as T).

Some popular methods of options' valuation:

  • Using analytic formulas
  • Binomial tree approach
  • Finite differences
  • Monte Carlo simulations

European options are an exception in the sense that there exist an analytical formula for their valuation, which is not the...