a. Option Pricing:
- Black-Scholes Model: This widely-used model estimates the price of options. It involves stochastic calculus to account for the randomness in asset prices and volatility. The formula calculates the theoretical price of options, helping traders and investors make informed decisions.
b. Bond Pricing:
- Bonds are priced based on the present value of their future cash flows, discounted at the bond’s yield. Mathematical formulas, such as the present value formula, are used to determine the fair value of bonds.
