Options and Derivatives Programming in C++23: Algorithms and Programming Techniques for the Financial Industry by Carlos Oliveira

Options and Derivatives Programming in C++23: Algorithms and Programming Techniques for the Financial Industry by Carlos Oliveira

1.

Options Concepts
Carlos Oliveira
Seattle, WA, USA

In the last few decades, software development has become an integral
part of the financial and investment industry. Advances in trading
infrastructure, as well as the need for increased volume and liquidity,
have prompted financial institutions to adopt computational
techniques as part of their day-to-day operations. This means that there
are many opportunities for computer scientists specializing in the
design and development of automated strategies for trading and
analyzing stocks, options, and other financial derivatives.
Options are among the several investment vehicles that are
currently traded using automated methods, as you will learn in the
following chapters. Given the mathematical structure and properties of
options and related derivatives, it is possible to explore their features in
a controlled way, which is ideal for the application of computational
algorithms. In this book, I present many of the computational
techniques currently used to develop strategies in order to trade
options and other derivatives.
An option is a standard financial contract that derives its value from
an underlying asset such as common stock, foreign currency, a basket of
stocks, or a commodity. Options can be used to pursue multiple
economic objectives, such as hedging against large variations on the
underlying asset, or speculating on the future price of a stock. This
chapter presents the basic concepts of options, along with supporting
definitions. These concepts will be used in the next few chapters to
describe algorithms and strategies with their implementation in C++20.
In this chapter, I also give an overview of the use of C++ in the financial
industry and how options can be modeled using this language.
The following concepts are explored in the next sections:
Basic definitions: You will learn fundamental definitions about option
contracts and how they are used in the investment industry.
Fundamental option strategies: Due to their flexibility, options can be
combined in a surprisingly large number of investment strategies.
You will learn about some of the most common option strategies and
how to model them using C++.
Option Greeks: One of the advantages of options investing is that it
promotes a very analytical view of financial decisions. Each option is
defined by a set of mathematical quantities called Greeks, which
reflect the properties of an option contract at each moment in time.
Delta hedging: One of the ways to use options is to create a hedge for
some other underlying asset positions. This is called delta hedging,
and it is widely used in the financial industry. You will see how this
investment technique works and how it can be modeled using C++.
Basic Definitions
Let’s start with an overview of concepts and programming problems
presented by options in the financial industry. Options are specialized
trading instruments and therefore require their users to be familiar
with a number of details about their operation. In this section, I
introduce some basic definitions about options and their associated
concepts.
In the financial markets, a basic activity is to buy or sell a financial
instrument. These instruments can be classified into several types, such
as company stock, government bonds, currencies, commodities, or
futures, among others. Options and derivatives are a class of financial
instruments that derive their value from other assets. They can only
exist in relation to a financial asset that is already traded, hence the
name derivative.
Before starting, take a quick look at Table 1-1 for a summary of the
most commonly used concepts. These concepts are defined in more
detail in the remaining parts of this chapter.

Options and Derivatives Programming in C++23: Algorithms and Programming Techniques for the Financial Industry by Carlos Oliveira