How are derivatives priced?

Derivatives are priced based on several factors such as the underlying asset, the time to expiration, the volatility of the underlying asset, and the prevailing interest rates. The most common method for pricing derivatives is the BlackScholes model, which provides a theoretical value for options based on the underlying asset price, the time to expiration, the strike price, the riskfree rate, and the volatility of the underlying asset.

Other pricing models, such as the binomial model and Monte Carlo simulations, may also be used depending on the type of derivative and the complexity of the underlying asset. It's important to note that the pricing of derivatives is not an exact science and involves some degree of estimation and uncertainty.