Option Premium = Intrinsic. Speculative Value. Value


 Candace Nicholson
 3 years ago
 Views:
Transcription
1 Chapters 4/ Part Options: Basic Concepts Options Call Options Put Options Selling Options Reading The Wall Street Journal Combinations of Options Valuing Options An OptionPricing Formula Investment in Real Projects and Options Summary and Conclusions Options Contracts: Preliminaries Option Definition. Calls versus Puts Call options Put options. Exercising the Option Strike Price or Exercise Price Expiration Date European versus American options Options Contracts: Preliminaries Value of an Option at Expiration Intrinsic Value Speculative Value Option Premium = Intrinsic Value + Speculative Value Impact of leverage Stock price is $. Buy shares Call strike is $, price is $. Buy contract. Put strike is $, price is $. Buy contract. ===================== C = S E P = E  S 3 Call Option Payoffs Put Option Payoffs Buy a put Write a call Write a put
2 Call Option Payoffs Call Option Payoffs Write a call Exercise price = $ 6 Exercise price = $ 7 Call Option Profits Put Option Payoffs Buy a put Option profits ($) Write a call Exercise price = $; option premium = $ 8 Exercise price = $ 9 Put Option Payoffs Put Option Profits Option profits ($) Write a put Buy a put 4 write a put Exercise price = $ Exercise price = $; option premium = $
3 Selling Options Writing Options The seller (or writer) of an option has an obligation. Option profits Option ($) profits ($) The purchaser of an option has an option. Write a put Buy a put Write a call 9 Call Option Payoffs at Expiration ( exercise) 6 E= E= Option Pricing Bounds at Expiration Reading The Wall Street Journal Upper bounds Call Options Put Options Lower Bounds Call option intrinsic value = max [, S  E] Put option intrinsic value = max [, E  S] Inthemoney / Outofthemoney Time premium/time decay At, an American call option is worth the same as a European option with the same characteristics. 4 Call Put Option/Strike Exp. Vol. Last Vol. Last IBM 3 Oct 364 ¼ 7 ¼ 38¼ 3 Jan 9½ 4 9¼ 38¼ 3 Jul 36 4¾ 43 3/6 38¼ 3 Aug 3 9¼ 94 ½ 38¼ 4 Jul 86 ¾ 47 ¾ 38¼ 4 Aug 93 6½ 8 7½ Valuing Options Option Value Determinants The last section concerned itself with the value of an option at. This section considers the value of an option prior to the date.. Exercise price. Stock price 3. Interest rate 4. Volatility in the stock price. Expiration date Call Put The value of a call option C must fall within max (S E, ) < C < S. The precise position will depend on these factors
4 Varying Option Input Values Varying Option Input Values Stock price: Call: as stock price increases call option price increases Put: as stock price increases put option price decreases Strike price: Call: as strike price increases call option price decreases Put: as strike price increases put option price increases Time until : Call & Put: as time to increases call and put option price increase Volatility: Call & Put: as volatility increases call & put value increase Riskfree rate: Call: as the riskfree rate increases call option price increases Put: as the riskfree rate increases put option price decreases 8 9 Figure.. Put and Call Option Prices 3 Figure.. Option Prices and Time to Expiration Option Price ($) Put Price Stock Price ($) Call Price Option Price ($) 3 Call Price Put Price Time to Expiration (months) Figure.3. Option Prices and Sigma Figure.4. Options Prices and Interest Rates Call Price Option Price ($) Call Price Put Price Option Price ($) Put Price Sigma (%) Interest Rate (%) 3 4
5 Option Value Determinants Market Value, Time Value and Intrinsic Value for an American Call Call Put. Exercise price +. Stock price + 3. Interest rate + 4. Volatility in the stock price + +. Expiration date + + The value of a call option C must fall within max (S E, ) < C < S. The precise position will depend on these factors. Profit loss The value of a call option C must fall within max (S E, ) < C < S. Time value C at > Max[S T  E, ] S T Market Value Intrinsic value E Outofthemoney Inthemoney S T  E S T 4 Combinations of Options Protective Put Strategy: Buy a Put and Buy the Underlying Stock: Payoffs at Expiration Puts and calls can serve as the building blocks for more complex option contracts. If you understand this, you can become a financial engineer, tailoring the riskreturn profile to meet your client s needs. $ Buy the stock Protective Put strategy has downside protection and upside potential Buy a put with an exercise price of $ $ $ Value of stock at 6 7 Protective Put Strategy Profits Covered Call Strategy $4 Buy the stock at $4 $4 Buy the stock at $4 $ $4 $4 $ Buy a put with $ for $ Protective Put strategy has downside protection and upside potential Value of stock at $ $ $3 $4 $3 $4 $ Sell a call with $ for $ Covered call Value of stock at 8 9
6 Long Straddle: Buy a Call and a Put Short Straddle: Sell a Call and a Put $4 $3 $ $ $ $3 $4 $ $6 $7 A Long Straddle only makes money if the stock price moves $ away from $. with an $ for $ Buy a put with an $ for $ Value of stock at 3 $ $ $ $3 $4 A Short Straddle only loses money if the stock price moves $ away from $. Sell a put with $ for $ $3 $4 $ $6 $7 Sell a call with an $ for $ Value of stock at 3 PutCall Parity S + P = C + Ee C = Call option price S = Current stock price r = Riskfree rate S + P C = Ee P = Put option price E = Option strike price T = Time until option Buy the stock, buy a put, and write a call; the sum of which equals the strike price discounted at the riskfree rate PutCall Parity Buy Stock & Buy Put Position Value Share Price Combination: Long Stock & Long Put Long Stock Long Put 3 33 PutCall Parity Buy Call & Buy Zero Coupon RiskFree Exercise Price Position Value Combination: Long Stock & Long Bond Long Bond Position Value PutCall Parity Share Price Long Stock Combination: Long Stock & Long Put Long Put Position Value Share Price Long Call Combination: Long Stock & Long Bond Long Bond Share Price Long Call 34 In market equilibrium, it must be the case that option prices are set such that: S + P = C + Ee Otherwise, riskless portfolios with positive payoffs exist. 3 6
7 The BlackScholes Model BlackScholes Model Value of a stock option is a function of 6 input factors:. Current price of underlying stock.. Strike price specified in the option contract. 3. Riskfree interest rate over the life of the contract. 4. Time remaining until the option contract expires.. Price volatility of the underlying stock. The price of a call option equals: C = S N ( d) E e N ( d) C = S N ( d) E e N ( d) Where the inputs are: S = Current stock price E = Option strike price r = Riskfree interest rate T = Time remaining until option σ = Sigma, representing stock price volatility, standard deviation BlackScholes Model BlackScholes Models C = S N ( d) E e N ( d) Where d and d equal: d = ln ( S ) σ + r T E + σ T d = d σ T 38 Remembering putcall parity, the value of a put, given the value of a call equals: S + P = C + Ee P = C S + Ee Also, remember at : C = S E P = E S 39 The BlackScholes Model Find the value of a sixmonth call option on the Microsoft with an $ The current value of a share of Microsoft is $6 The interest rate available in the U.S. is r = %. The option maturity is 6 months (half of a year). The standard deviation of the underlying asset is 3% per annum. Before we start, note that the intrinsic value of the option is $ our answer must be at least that amount. The BlackScholes Model Assume S = $6, X = $, T = 6 months, r = %, and σ = 3%, calculate the value of a call. First calculate d and d ln( S / E) + ( r +. ) T d = σ T ln(6 /) + (. +.(.3) ). d =.3. Then d, d = d σ T = = d =.8.3. =
8 The BlackScholes Model C = S N( d) Ee rt N( d) d =.8 d =. 36 C = $6.73 e C = $.9 N(d ) = N(.8) =.73 N(d ) = N(.36) = Another BlackScholes Example Assume S = $, X = $4, T = 6 months, r = %, and σ = 8%, calculate the value of a call and a put. d ln ( ) = =. d = = 686. From a standard normal probability table, look up N(d ) =.8 and N(d ) =.74 (or use Excel s normsdist function) C = (. 8) 4 e. (. ) (. 74) = $ P = $ 8. 3 $ + $ 4e. (. ) = $. 43 Real Options Collar: Buy a Put, Buy the Stock, Sell the Call Real estate developer buys 7 acres in a rural area. He plans on building a subdivision when the population from the city expands this direction. If growth is less than anticipated, the developer thinks he can sell the land to a country club to build a golf course on the property. The development option is a option. The golf course option is a option. How would these real options change the standard NPV analysis? $49.33 $.76 $ $.67 $7.9 $8 $ Buy a put with exercise price of $ for $.67 $8 Buy the stock at $8 $ Sell a call with $ for $.76 Collar $4. Value of stock at 44 NTS 4 8
Overview. Option Basics. Options and Derivatives. Professor Lasse H. Pedersen. Option basics and option strategies
Options and Derivatives Professor Lasse H. Pedersen Prof. Lasse H. Pedersen 1 Overview Option basics and option strategies Noarbitrage bounds on option prices Binomial option pricing BlackScholesMerton
More informationCall and Put. Options. American and European Options. Option Terminology. Payoffs of European Options. Different Types of Options
Call and Put Options A call option gives its holder the right to purchase an asset for a specified price, called the strike price, on or before some specified expiration date. A put option gives its holder
More informationUse the option quote information shown below to answer the following questions. The underlying stock is currently selling for $83.
Problems on the Basics of Options used in Finance 2. Understanding Option Quotes Use the option quote information shown below to answer the following questions. The underlying stock is currently selling
More informationOptions/1. Prof. Ian Giddy
Options/1 New York University Stern School of Business Options Prof. Ian Giddy New York University Options Puts and Calls PutCall Parity Combinations and Trading Strategies Valuation Hedging Options2
More informationOptions Markets: Introduction
Options Markets: Introduction Chapter 20 Option Contracts call option = contract that gives the holder the right to purchase an asset at a specified price, on or before a certain date put option = contract
More informationChapter 11 Options. Main Issues. Introduction to Options. Use of Options. Properties of Option Prices. Valuation Models of Options.
Chapter 11 Options Road Map Part A Introduction to finance. Part B Valuation of assets, given discount rates. Part C Determination of riskadjusted discount rate. Part D Introduction to derivatives. Forwards
More informationChapter 8 Financial Options and Applications in Corporate Finance ANSWERS TO ENDOFCHAPTER QUESTIONS
Chapter 8 Financial Options and Applications in Corporate Finance ANSWERS TO ENDOFCHAPTER QUESTIONS 81 a. An option is a contract which gives its holder the right to buy or sell an asset at some predetermined
More information2. How is a fund manager motivated to behave with this type of renumeration package?
MØA 155 PROBLEM SET: Options Exercise 1. Arbitrage [2] In the discussions of some of the models in this course, we relied on the following type of argument: If two investment strategies have the same payoff
More informationFin 3710 Investment Analysis Professor Rui Yao CHAPTER 14: OPTIONS MARKETS
HW 6 Fin 3710 Investment Analysis Professor Rui Yao CHAPTER 14: OPTIONS MARKETS 4. Cost Payoff Profit Call option, X = 85 3.82 5.00 +1.18 Put option, X = 85 0.15 0.000.15 Call option, X = 90 0.40 0.000.40
More informationFinance 436 Futures and Options Review Notes for Final Exam. Chapter 9
Finance 436 Futures and Options Review Notes for Final Exam Chapter 9 1. Options: call options vs. put options, American options vs. European options 2. Characteristics: option premium, option type, underlying
More informationOption Valuation. Chapter 21
Option Valuation Chapter 21 Intrinsic and Time Value intrinsic value of inthemoney options = the payoff that could be obtained from the immediate exercise of the option for a call option: stock price
More informationFigure S9.1 Profit from long position in Problem 9.9
Problem 9.9 Suppose that a European call option to buy a share for $100.00 costs $5.00 and is held until maturity. Under what circumstances will the holder of the option make a profit? Under what circumstances
More informationCHAPTER 22 Options and Corporate Finance
CHAPTER 22 Options and Corporate Finance Multiple Choice Questions: I. DEFINITIONS OPTIONS a 1. A financial contract that gives its owner the right, but not the obligation, to buy or sell a specified asset
More informationFactors Affecting Option Prices
Factors Affecting Option Prices 1. The current stock price S 0. 2. The option strike price K. 3. The time to expiration T. 4. The volatility of the stock price σ. 5. The riskfree interest rate r. 6. The
More informationOptions Pricing. This is sometimes referred to as the intrinsic value of the option.
Options Pricing We will use the example of a call option in discussing the pricing issue. Later, we will turn our attention to the PutCall Parity Relationship. I. Preliminary Material Recall the payoff
More informationCHAPTER 20. Financial Options. Chapter Synopsis
CHAPTER 20 Financial Options Chapter Synopsis 20.1 Option Basics A financial option gives its owner the right, but not the obligation, to buy or sell a financial asset at a fixed price on or until a specified
More informationIntroduction to Options
Introduction to Options By: Peter Findley and Sreesha Vaman Investment Analysis Group What Is An Option? One contract is the right to buy or sell 100 shares The price of the option depends on the price
More informationIntroduction to Options. Derivatives
Introduction to Options Econ 422: Investment, Capital & Finance University of Washington Summer 2010 August 18, 2010 Derivatives A derivative is a security whose payoff or value depends on (is derived
More informationLecture 7: Bounds on Options Prices Steven Skiena. http://www.cs.sunysb.edu/ skiena
Lecture 7: Bounds on Options Prices Steven Skiena Department of Computer Science State University of New York Stony Brook, NY 11794 4400 http://www.cs.sunysb.edu/ skiena Option Price Quotes Reading the
More informationChapter 21: Options and Corporate Finance
Chapter 21: Options and Corporate Finance 21.1 a. An option is a contract which gives its owner the right to buy or sell an underlying asset at a fixed price on or before a given date. b. Exercise is the
More informationOption Values. Determinants of Call Option Values. CHAPTER 16 Option Valuation. Figure 16.1 Call Option Value Before Expiration
CHAPTER 16 Option Valuation 16.1 OPTION VALUATION: INTRODUCTION Option Values Intrinsic value  profit that could be made if the option was immediately exercised Call: stock price  exercise price Put:
More informationLecture 5: Put  Call Parity
Lecture 5: Put  Call Parity Reading: J.C.Hull, Chapter 9 Reminder: basic assumptions 1. There are no arbitrage opportunities, i.e. no party can get a riskless profit. 2. Borrowing and lending are possible
More informationGoals. Options. Derivatives: Definition. Goals. Definitions Options. Spring 2007 Lecture Notes 4.6.1 Readings:Mayo 28.
Goals Options Spring 27 Lecture Notes 4.6.1 Readings:Mayo 28 Definitions Options Call option Put option Option strategies Derivatives: Definition Derivative: Any security whose payoff depends on any other
More informationOPTIONS MARKETS AND VALUATIONS (CHAPTERS 16 & 17)
OPTIONS MARKETS AND VALUATIONS (CHAPTERS 16 & 17) WHAT ARE OPTIONS? Derivative securities whose values are derived from the values of the underlying securities. Stock options quotations from WSJ. A call
More informationFinance 400 A. Penati  G. Pennacchi. Option Pricing
Finance 400 A. Penati  G. Pennacchi Option Pricing Earlier we derived general pricing relationships for contingent claims in terms of an equilibrium stochastic discount factor or in terms of elementary
More informationChapter 17 Option Pricing with Applications to Real Options ANSWERS TO SELECTED ENDOFCHAPTER QUESTIONS
Chapter 17 Option Pricing with Applications to Real Options ANSWERS TO SELECTED ENDOFCHAPTER QUESTIONS 171 a. An option is a contract which gives its holder the right to buy or sell an asset at some
More informationFIN40008 FINANCIAL INSTRUMENTS SPRING 2008. Options
FIN40008 FINANCIAL INSTRUMENTS SPRING 2008 Options These notes describe the payoffs to European and American put and call options the socalled plain vanilla options. We consider the payoffs to these
More informationOptions: Valuation and (No) Arbitrage
Prof. Alex Shapiro Lecture Notes 15 Options: Valuation and (No) Arbitrage I. Readings and Suggested Practice Problems II. Introduction: Objectives and Notation III. No Arbitrage Pricing Bound IV. The Binomial
More information11 Option. Payoffs and Option Strategies. Answers to Questions and Problems
11 Option Payoffs and Option Strategies Answers to Questions and Problems 1. Consider a call option with an exercise price of $80 and a cost of $5. Graph the profits and losses at expiration for various
More informationOptions (1) Class 19 Financial Management, 15.414
Options (1) Class 19 Financial Management, 15.414 Today Options Risk management: Why, how, and what? Option payoffs Reading Brealey and Myers, Chapter 2, 21 Sally Jameson 2 Types of questions Your company,
More information9 Basics of options, including trading strategies
ECG590I Asset Pricing. Lecture 9: Basics of options, including trading strategies 1 9 Basics of options, including trading strategies Option: The option of buying (call) or selling (put) an asset. European
More informationOption Pricing Basics
Option Pricing Basics Aswath Damodaran Aswath Damodaran 1 What is an option? An option provides the holder with the right to buy or sell a specified quantity of an underlying asset at a fixed price (called
More informationLecture 12. Options Strategies
Lecture 12. Options Strategies Introduction to Options Strategies Options, Futures, Derivatives 10/15/07 back to start 1 Solutions Problem 6:23: Assume that a bank can borrow or lend money at the same
More informationDERIVATIVE SECURITIES Lecture 2: Binomial Option Pricing and Call Options
DERIVATIVE SECURITIES Lecture 2: Binomial Option Pricing and Call Options Philip H. Dybvig Washington University in Saint Louis review of pricing formulas assets versus futures practical issues call options
More informationCHAPTER 20: OPTIONS MARKETS: INTRODUCTION
CHAPTER 20: OPTIONS MARKETS: INTRODUCTION PROBLEM SETS 1. Options provide numerous opportunities to modify the risk profile of a portfolio. The simplest example of an option strategy that increases risk
More informationCHAPTER 21: OPTION VALUATION
CHAPTER 21: OPTION VALUATION PROBLEM SETS 1. The value of a put option also increases with the volatility of the stock. We see this from the putcall parity theorem as follows: P = C S + PV(X) + PV(Dividends)
More informationFIN40008 FINANCIAL INSTRUMENTS SPRING 2008
FIN40008 FINANCIAL INSTRUMENTS SPRING 2008 Options These notes consider the way put and call options and the underlying can be combined to create hedges, spreads and combinations. We will consider the
More informationAmerican and European. Put Option
American and European Put Option Analytical Finance I Kinda Sumlaji 1 Table of Contents: 1. Introduction... 3 2. Option Style... 4 3. Put Option 4 3.1 Definition 4 3.2 Payoff at Maturity... 4 3.3 Example
More informationOption Theory Basics
Option Basics What is an Option? Option Theory Basics An option is a traded security that is a derivative product. By derivative product we mean that it is a product whose value is based upon, or derived
More informationChapter 1: Financial Markets and Financial Derivatives
Chapter 1: Financial Markets and Financial Derivatives 1.1 Financial Markets Financial markets are markets for financial instruments, in which buyers and sellers find each other and create or exchange
More information6. Foreign Currency Options
6. Foreign Currency Options So far, we have studied contracts whose payoffs are contingent on the spot rate (foreign currency forward and foreign currency futures). he payoffs from these instruments are
More informationunderstanding options
Investment Planning understanding options Get acquainted with this versatile investment tool. Understanding Options This brochure discusses the basic concepts of options: what they are, common investment
More informationOption Payoffs. Problems 11 through 16: Describe (as I have in 110) the strategy depicted by each payoff diagram. #11 #12 #13 #14 #15 #16
Option s Problems 1 through 1: Assume that the stock is currently trading at $2 per share and options and bonds have the prices given in the table below. Depending on the strike price (X) of the option
More informationChapter 20 Understanding Options
Chapter 20 Understanding Options Multiple Choice Questions 1. Firms regularly use the following to reduce risk: (I) Currency options (II) Interestrate options (III) Commodity options D) I, II, and III
More informationCHAPTER 21: OPTION VALUATION
CHAPTER 21: OPTION VALUATION 1. Put values also must increase as the volatility of the underlying stock increases. We see this from the parity relation as follows: P = C + PV(X) S 0 + PV(Dividends). Given
More informationChapter 21 Valuing Options
Chapter 21 Valuing Options Multiple Choice Questions 1. Relative to the underlying stock, a call option always has: A) A higher beta and a higher standard deviation of return B) A lower beta and a higher
More informationb. June expiration: 9523 = 95 + 23/32 % = 95.71875% or.9571875.9571875 X $100,000 = $95,718.75.
ANSWERS FOR FINANCIAL RISK MANAGEMENT A. 24 Value of Tbond Futures Contracts a. March expiration: The settle price is stated as a percentage of the face value of the bond with the final "27" being read
More informationBuying Call or Long Call. Unlimited Profit Potential
Options Basis 1 An Investor can use options to achieve a number of different things depending on the strategy the investor employs. Novice option traders will be allowed to buy calls and puts, to anticipate
More informationHedging. An Undergraduate Introduction to Financial Mathematics. J. Robert Buchanan. J. Robert Buchanan Hedging
Hedging An Undergraduate Introduction to Financial Mathematics J. Robert Buchanan 2010 Introduction Definition Hedging is the practice of making a portfolio of investments less sensitive to changes in
More informationPart V: Option Pricing Basics
erivatives & Risk Management First Week: Part A: Option Fundamentals payoffs market microstructure Next 2 Weeks: Part B: Option Pricing fundamentals: intrinsic vs. time value, putcall parity introduction
More informationLecture Notes: Basic Concepts in Option Pricing  The Black and Scholes Model
Brunel University Msc., EC5504, Financial Engineering Prof Menelaos Karanasos Lecture Notes: Basic Concepts in Option Pricing  The Black and Scholes Model Recall that the price of an option is equal to
More informationOption pricing. Vinod Kothari
Option pricing Vinod Kothari Notation we use this Chapter will be as follows: S o : Price of the share at time 0 S T : Price of the share at time T T : time to maturity of the option r : risk free rate
More informationOptions, Derivatives, Risk Management
1/1 Options, Derivatives, Risk Management (Welch, Chapter 27) Ivo Welch UCLA Anderson School, Corporate Finance, Winter 2014 January 13, 2015 Did you bring your calculator? Did you read these notes and
More informationEXP 481  Capital Markets Option Pricing. Options: Definitions. Arbitrage Restrictions on Call Prices. Arbitrage Restrictions on Call Prices 1) C > 0
EXP 481  Capital Markets Option Pricing imple arbitrage relations Payoffs to call options Blackcholes model PutCall Parity Implied Volatility Options: Definitions A call option gives the buyer the
More information2. Exercising the option  buying or selling asset by using option. 3. Strike (or exercise) price  price at which asset may be bought or sold
Chapter 21 : Options1 CHAPTER 21. OPTIONS Contents I. INTRODUCTION BASIC TERMS II. VALUATION OF OPTIONS A. Minimum Values of Options B. Maximum Values of Options C. Determinants of Call Value D. BlackScholes
More informationCurrency and Interest Rate Options
Tuesdays 6:109:00 p.m. Commerce 260306 Wednesdays 9:10 a.m.12 noon Commerce 260508 Handout #15 Derivative Security Markets Currency and Interest Rate Options Course web pages: http://finance2010.pageout.net
More informationCHAPTER 22: FUTURES MARKETS
CHAPTER 22: FUTURES MARKETS PROBLEM SETS 1. There is little hedging or speculative demand for cement futures, since cement prices are fairly stable and predictable. The trading activity necessary to support
More informationExample 1. Consider the following two portfolios: 2. Buy one c(s(t), 20, τ, r) and sell one c(s(t), 10, τ, r).
Chapter 4 PutCall Parity 1 Bull and Bear Financial analysts use words such as bull and bear to describe the trend in stock markets. Generally speaking, a bull market is characterized by rising prices.
More informationManual for SOA Exam FM/CAS Exam 2.
Manual for SOA Exam FM/CAS Exam 2. Chapter 7. Derivatives markets. c 2009. Miguel A. Arcones. All rights reserved. Extract from: Arcones Manual for the SOA Exam FM/CAS Exam 2, Financial Mathematics. Fall
More informationStock. Call. Put. Bond. Option Fundamentals
Option Fundamentals Payoff Diagrams hese are the basic building blocks of financial engineering. hey represent the payoffs or terminal values of various investment choices. We shall assume that the maturity
More informationECMC49F Options Practice Questions Suggested Solution Date: Nov 14, 2005
ECMC49F Options Practice Questions Suggested Solution Date: Nov 14, 2005 Options: General [1] Define the following terms associated with options: a. Option An option is a contract which gives the holder
More informationTrading around a position using covered calls
Trading around a position using covered calls June 23, 2011 1 Trading around a position using covered calls June 23, 2011 June 23, 2011 2 Disclaimer This presentation is the creation of Roger Manzolini
More informationFundamentals of Futures and Options (a summary)
Fundamentals of Futures and Options (a summary) Roger G. Clarke, Harindra de Silva, CFA, and Steven Thorley, CFA Published 2013 by the Research Foundation of CFA Institute Summary prepared by Roger G.
More informationSession X: Lecturer: Dr. Jose Olmo. Module: Economics of Financial Markets. MSc. Financial Economics. Department of Economics, City University, London
Session X: Options: Hedging, Insurance and Trading Strategies Lecturer: Dr. Jose Olmo Module: Economics of Financial Markets MSc. Financial Economics Department of Economics, City University, London Option
More informationAmerican Options. An Undergraduate Introduction to Financial Mathematics. J. Robert Buchanan. J. Robert Buchanan American Options
American Options An Undergraduate Introduction to Financial Mathematics J. Robert Buchanan 2010 Early Exercise Since American style options give the holder the same rights as European style options plus
More informationMarket and Exercise Price Relationships. Option Terminology. Options Trading. CHAPTER 15 Options Markets 15.1 THE OPTION CONTRACT
CHAPTER 15 Options Markets 15.1 THE OPTION CONTRACT Option Terminology Buy  Long Sell  Short Call the right to buy Put the the right to sell Key Elements Exercise or Strike Price Premium or Price of
More informationOption Properties. Liuren Wu. Zicklin School of Business, Baruch College. Options Markets. (Hull chapter: 9)
Option Properties Liuren Wu Zicklin School of Business, Baruch College Options Markets (Hull chapter: 9) Liuren Wu (Baruch) Option Properties Options Markets 1 / 17 Notation c: European call option price.
More informationUnderlying (S) The asset, which the option buyer has the right to buy or sell. Notation: S or S t = S(t)
INTRODUCTION TO OPTIONS Readings: Hull, Chapters 8, 9, and 10 Part I. Options Basics Options Lexicon Options Payoffs (Payoff diagrams) Calls and Puts as two halves of a forward contract: the PutCallForward
More informationLecture 21 Options Pricing
Lecture 21 Options Pricing Readings BM, chapter 20 Reader, Lecture 21 M. Spiegel and R. Stanton, 2000 1 Outline Last lecture: Examples of options Derivatives and risk (mis)management Replication and Putcall
More informationCHAPTER 20: OPTIONS MARKETS: INTRODUCTION
CHAPTER 20: OPTIONS MARKETS: INTRODUCTION 1. Cost Profit Call option, X = 95 12.20 10 2.20 Put option, X = 95 1.65 0 1.65 Call option, X = 105 4.70 0 4.70 Put option, X = 105 4.40 0 4.40 Call option, X
More informationCHAPTER 20 Understanding Options
CHAPTER 20 Understanding Options Answers to Practice Questions 1. a. The put places a floor on value of investment, i.e., less risky than buying stock. The risk reduction comes at the cost of the option
More informationt = 1 2 3 1. Calculate the implied interest rates and graph the term structure of interest rates. t = 1 2 3 X t = 100 100 100 t = 1 2 3
MØA 155 PROBLEM SET: Summarizing Exercise 1. Present Value [3] You are given the following prices P t today for receiving risk free payments t periods from now. t = 1 2 3 P t = 0.95 0.9 0.85 1. Calculate
More informationChapter 15 OPTIONS ON MONEY MARKET FUTURES
Page 218 The information in this chapter was last updated in 1993. Since the money market evolves very rapidly, recent developments may have superseded some of the content of this chapter. Chapter 15 OPTIONS
More informationHedging Strategies Using
Chapter 4 Hedging Strategies Using Futures and Options 4.1 Basic Strategies Using Futures While the use of short and long hedges can reduce (or eliminate in some cases  as below) both downside and upside
More informationLecture 4: Properties of stock options
Lecture 4: Properties of stock options Reading: J.C.Hull, Chapter 9 An European call option is an agreement between two parties giving the holder the right to buy a certain asset (e.g. one stock unit)
More informationEXERCISES FROM HULL S BOOK
EXERCISES FROM HULL S BOOK 1. Three put options on a stock have the same expiration date, and strike prices of $55, $60, and $65. The market price are $3, $5, and $8, respectively. Explain how a butter
More informationFactors Affecting Option Prices. Ron Shonkwiler (shonkwiler@math.gatech.edu) www.math.gatech.edu/ shenk
1 Factors Affecting Option Prices Ron Shonkwiler (shonkwiler@math.gatech.edu) www.math.gatech.edu/ shenk 1 Factors Affecting Option Prices Ron Shonkwiler (shonkwiler@math.gatech.edu) www.math.gatech.edu/
More informationTrading Strategies Involving Options. Chapter 11
Trading Strategies Involving Options Chapter 11 1 Strategies to be Considered A riskfree bond and an option to create a principalprotected note A stock and an option Two or more options of the same type
More informationJorge Cruz Lopez  Bus 316: Derivative Securities. Week 9. Binomial Trees : Hull, Ch. 12.
Week 9 Binomial Trees : Hull, Ch. 12. 1 Binomial Trees Objective: To explain how the binomial model can be used to price options. 2 Binomial Trees 1. Introduction. 2. One Step Binomial Model. 3. Risk Neutral
More informationFIN 3710. Final (Practice) Exam 05/23/06
FIN 3710 Investment Analysis Spring 2006 Zicklin School of Business Baruch College Professor Rui Yao FIN 3710 Final (Practice) Exam 05/23/06 NAME: (Please print your name here) PLEDGE: (Sign your name
More informationWeek 12. Options on Stock Indices and Currencies: Hull, Ch. 15. Employee Stock Options: Hull, Ch. 14.
Week 12 Options on Stock Indices and Currencies: Hull, Ch. 15. Employee Stock Options: Hull, Ch. 14. 1 Options on Stock Indices and Currencies Objective: To explain the basic asset pricing techniques used
More informationFIN 673 Pricing Real Options
FIN 673 Pricing Real Options Professor Robert B.H. Hauswald Kogod School of Business, AU From Financial to Real Options Option pricing: a reminder messy and intuitive: lattices (trees) elegant and mysterious:
More information1 The BlackScholes Formula
1 The BlackScholes Formula In 1973 Fischer Black and Myron Scholes published a formula  the BlackScholes formula  for computing the theoretical price of a European call option on a stock. Their paper,
More informationReview of Basic Options Concepts and Terminology
Review of Basic Options Concepts and Terminology March 24, 2005 1 Introduction The purchase of an options contract gives the buyer the right to buy call options contract or sell put options contract some
More informationChapter 2 An Introduction to Forwards and Options
Chapter 2 An Introduction to Forwards and Options Question 2.1. The payoff diagram of the stock is just a graph of the stock price as a function of the stock price: In order to obtain the profit diagram
More informationOPTION VALUATION. Topics in Corporate Finance P A R T 8. ON JULY 7, 2008, the closing stock prices for LEARNING OBJECTIVES
LEARNING OBJECTIVES After studying this chapter, you should understand: LO1 The relationship between stock prices, call prices, and put prices using put call parity. LO2 The famous Black Scholes option
More informationSession IX: Lecturer: Dr. Jose Olmo. Module: Economics of Financial Markets. MSc. Financial Economics
Session IX: Stock Options: Properties, Mechanics and Valuation Lecturer: Dr. Jose Olmo Module: Economics of Financial Markets MSc. Financial Economics Department of Economics, City University, London Stock
More informationOptions. Moty Katzman. September 19, 2014
Options Moty Katzman September 19, 2014 What are options? Options are contracts conferring certain rights regarding the buying or selling of assets. A European call option gives the owner the right to
More informationOptions. + Concepts and Buzzwords. Readings. PutCall Parity Volatility Effects
+ Options + Concepts and Buzzwords PutCall Parity Volatility Effects Call, put, European, American, underlying asset, strike price, expiration date Readings Tuckman, Chapter 19 Veronesi, Chapter 6 Options
More informationFX, Derivatives and DCM workshop I. Introduction to Options
Introduction to Options What is a Currency Option Contract? A financial agreement giving the buyer the right (but not the obligation) to buy/sell a specified amount of currency at a specified rate on a
More informationDerivatives: Options
Derivatives: Options Call Option: The right, but not the obligation, to buy an asset at a specified exercise (or, strike) price on or before a specified date. Put Option: The right, but not the obligation,
More informationGuide to Options Strategies
RECOGNIA S Guide to Options Strategies A breakdown of key options strategies to help you better understand the characteristics and implications of each Recognia s Guide to Options Strategies 1 3 Buying
More informationPayoff (Riskless bond) Payoff(Call) Combined
ShortAnswer 1. Is the payoff to stockholders most similar to the payoff on a long put, a long call, a short put, a short call or some combination of these options? Long call 2. ebay s current stock price
More informationSLVO Silver Shares Covered Call ETN
Filed pursuant to Rule 433 Registration Statement No. 33318030003 April 15, 2014 SLVO Silver Shares Covered Call ETN Credit Suisse AG, Investor Solutions April 2014 Executive Summary Credit Suisse Silver
More informationInstitutional Finance 08: Dynamic Arbitrage to Replicate Nonlinear Payoffs. Binomial Option Pricing: Basics (Chapter 10 of McDonald)
Copyright 2003 Pearson Education, Inc. Slide 081 Institutional Finance 08: Dynamic Arbitrage to Replicate Nonlinear Payoffs Binomial Option Pricing: Basics (Chapter 10 of McDonald) Originally prepared
More informationPart A: The put call parity relation is: call + present value of exercise price = put + stock price.
Corporate Finance Mod 20: Options, put call parity relation, Practice Problem s ** Exercise 20.1: Put Call Parity Relation! One year European put and call options trade on a stock with strike prices of
More informationOption Values. Option Valuation. Call Option Value before Expiration. Determinants of Call Option Values
Option Values Option Valuation Intrinsic value profit that could be made if the option was immediately exercised Call: stock price exercise price : S T X i i k i X S Put: exercise price stock price : X
More informationInvesco Great Wall Fund Management Co. Shenzhen: June 14, 2008
: A Stern School of Business New York University Invesco Great Wall Fund Management Co. Shenzhen: June 14, 2008 Outline 1 2 3 4 5 6 se notes review the principles underlying option pricing and some of
More informationwww.optionseducation.org OIC Options on ETFs
www.optionseducation.org Options on ETFs 1 The Options Industry Council For the sake of simplicity, the examples that follow do not take into consideration commissions and other transaction fees, tax considerations,
More information