Best writers. Best papers. Let professionals take care of your academic papers

Order a similar paper and get 15% discount on your first order with us
Use the following coupon "FIRST15"
ORDER NOW

Financial Option

1) Math Type Plugin

2) Math Player (free versions available)

3) NVDA Reader (free versions available)

 

Slides in this presentation contain hyperlinks. JAWS users should be able to get a list of links by using INSERT+F7

1

Chapter Outline

20.1 Option Basics

20.2 Option Payoffs at Expiration

20.3 Put-Call Parity

20.4 Factors Affecting Option Prices

20.5 Exercising Options Early

20.6 Options and Corporate Finance

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

 

2

Learning Objectives (1 of 3)

Define the following terms: call option, put option, exercise price, strike price, exercising the option, expiration date, American option, European option, in-the-money, and out-of-the-money.

Compute the value of a call or a put option at expiration.

List the rights and obligations of the buyer of the option and the seller of the option.

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

Learning Objectives (2 of 3)

Use put-call parity to solve for the call premium, the put premium, the stock price, the strike price, or the dividend.

Discuss the following factors that influence call and put option values: stock price, strike price, and volatility.

Describe arbitrage bounds for option prices.

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

Learning Objectives (3 of 3)

Explain why it is never optimal to exercise an American call option early on a non-dividend-paying stock, and why it is sometimes optimal to exercise an American put option early.

Explain the use of option modeling to value equity.

Describe how corporate debt can be viewed as a portfolio of riskless debt and a short position in a put option.

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

20.1 Option Basics (1 of 2)

Financial Option

A contract that gives its owner the right (but not the obligation) to purchase or sell an asset at a fixed price as some future date

Call Option

A financial option that gives its owner the right to buy an asset

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

20.1 Option Basics (2 of 2)

Put Option

A financial option that gives its owner the right to sell an asset

Option Writer

The seller of an option contract

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

Understanding Option Contracts (1 of 3)

Exercising an Option

When a holder of an option enforces the agreement and buys or sells a share of stock at the agreed-upon price

Strike Price (Exercise Price)

The price at which an option holder buys or sells a share of stock when the option is exercised

Expiration Date

The last date on which an option holder has the right to exercise the option

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

Understanding Option Contracts (2 of 3)

American Option

Options that allow their holders to exercise the option on any date up to, and including, the expiration date

European Option

Options that allow their holders to exercise the option only on the expiration date

Note: The names American and European have nothing to do with the location where the options are traded

Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved

Understanding Option Contracts (3 of 3)

The option buyer (holder)

Holds the right to exercise the option and has a long position in the contract

The option seller (writer)

Sells (or writes) the option and has a short position in the contract

Because the long side has the option to exercise, the short side has an obligation to fulfill the contract if it is exercised.

The buyer pays the writer a premium