Derivative Modules

Two types of derivative, futures and options are covered, futures and options as described below.

Inputs to the calculator are expected in continuously compounded form and as an aid to users the futures calculator contains a sub calculator that can convert quoted rates (T-bill and LIBOR) to continuously compounded rates as well as convert discrete compounding rates to equivalent continuously compounded rates.

The calculator automatically retrieves current selected futures prices from the web or it can be linked to Excel to increase it's applicability to global futures markets.

To see some lessons built around the Futures Calculator click on futures.

First, the binomial option pricing model can be introduced using the Binomial Tree Module.  This lets users work with trees of one, two or three periods be automatically created and a variety of option pricing problems be automatically solved.  Both discrete and continuous compounding is supported.  For lesson examples click on Binomial.  Next in the Exotic Options Module users can work with up to four periods to draw binomial trees and solve a variety of exotic option problems.  For a lesson example click on Exotic.

Second, the simple binomial model can then be extended to a large number of periods using the Binomial Tree:  Limiting Behavior Model.  Comparisons can then be made between the rate and path of convergence of the Binomial and Trinomial (e.g., see Hull) approximations and the Black Scholes pricing model.  For a lesson example click on Limit.

The next set of option modules extend the application of the modules to the real world option markets.

First, the Option Payoff Module lets users learn about option trading strategies using the data provided.  This visual module has a wide range of strategies pre-programmed for easier learning plus it provides the flexibility for the user to engineer their own strategies.  For a comprehensive set of lessons click on Payoffs.  Second, the Option Calculator among other things, lets users solve both European and American real world pricing problems, estimate implied volatilities and the "Greeks" (delta, gamma, vega etc.,).  It also lets users explore visually how these "Greeks", prices, and time vary among themselves for the actual  option they are working with.   It is linked to web so that all it's computational power can be completed at the click of the mouse without manually entering inputs to the option pricing problem.  For a comprehensive set of lessons click on Calculator.

Finally, for advanced derivative courses and practitioners the Option Portfolio Module provides a complete option support module.  This module solves implied volatility smiles (e.g., see Hull) and the implied volatility structure for a set of real world options at the click of the mouse using current prices available from the web.  Users can work with both regular pre-programmed option trading strategies or their own.  It goes beyond simple terminal payoff diagrams to provide a complete risk management support system for spot positions involving multiple options.  The module is aimed at intermediate to advanced option courses.