So in order to decide when to operate this plant and when to shut it down, I need to have a lattice of gold. The extraction rate is 10,000 ounces per year. The extraction rate, and cost are as follows. So that's going to be Q and one minus Q, respectively. And therefore, from there I can calculate out what the risk-neutral probability of the up state is, and the risk-neutral probability of the down state is. ![]() It can go up by a factor of 1.2 or go down with a factor of 0.9. The current price of gold is $400 per ounce. And what is the net revenue gain that I would get from that option? So here are the details of the model. In the next half of this module we are going to value an equipment upgrade option that is also valid over the ten years that we are trying to figure out when we will exercise it. The first half of this module is about the operating option, meaning that the only thing that I'm trying to value is a lease over ten periods and every year I have the option of either shutting down the mine or operating it at the maximum possible rate. In this module, we'll go through the Simplico Gold Mine example that we introduced in the video modules. The final module is the application of option pricing methodologies and takes natural gas and electricity related options as an example to introduce valuation methods such as dynamic programming in real options. We will cover CDO’s definition, simple and synthetic versions of CDO, and CDO portfolios. The third module involves topics in credit derivatives and structured products and focuses on Credit Debit Obligation (CDO), which played an important part in the past financial crisis starting from 2007. We will discuss pricing by volatility surface as well as explanations of volatility smile and skew, which are common in real markets. The second module reveals how option’s theoretical price links to real market price-by implied volatility. Then we will analyze risk management of derivatives portfolios from two perspectives-Greeks approach and scenario analysis. Greeks are important in risk management and hedging and often used to measure portfolio value change. ![]() ![]() The first module is designed to understand the Black-Scholes model and utilize it to derive Greeks, which measures the sensitivity of option value to variables such as underlying asset price, volatility, and time to maturity. This course discusses topics in derivative pricing.
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