Flashcards
10. Options and options pricing
Cards in this deck (20)
- 1Definition of an optionAn agreement made today
To buy/sell the underlying asset
At a future date
With the P agreed today - 2ContinuedChoice to exercise UA
Call option: buy
Put option: sell
Pay a premium when buy either option - 3Call optionPay off will be higher of:
SP - EP
Zero - 4Put optionPay off will be higher of:
EP - SP
Zero - 5Writing options offInvestors receive premium income up front
Payoff for option writer increased by premium amount received
Payoff for option buyer decreased by premium amount paid - 6Further contractsMust buy min of 1 contract, 1000 shares
Option trading doesn't affect co.
1 option contract bought, 1 sold by opposite party
No. of contracts bought/sold is open interest - 7American optionsExercised any time up to and including maturity
- 8In the £Worthwhile to exercise
Call: SP>EP
Put: SP - 9Out of the £Not worthwhile
Call: SPEP - 10At the £SP=EP
- 11Intrinsic valuePayoff if option could be exercised now
If out of £, =0 - 12Time valuePremium - intrinsic value
- 13Factors affecting OPsEP
Time to maturity
P of underlying asset
Rf IR
Volatility of Rs on UA - 14Black Scholes modelC ~ f(S,r,T,Ex,VAR)
Based on replication strategy
Combinations of assets w. same payoff, P must be the same - prevent arb ops
- buying share and investing in Rf asset
- buying call - 15AssumptionsContinuum of P - doesn't jump
Following continuum, there's a distribution of possible Rs
Rs log normally distributed
No divs paid on underlying share
Assume European options - 16Trading combinations: shares and optionsA straddle: buy call and put on same UA w. same EP
A strangle: different EP
Protective put: buy put and UA - 17Protective putPayoff at maturity = call payoff +EP
To prevent arb: PPP today = call cost w same EP and maturity as put +PV of EP
S + P = C + PV(EP) - Put Call parity theorem - 18Put Call Parity theoremShows relationship b/w call and put OPs
On same UA w same maturity and EP
Way of deriving theoretical Ps for European put options - 19Application of BS model in valuation of..Options of different UAs
Rights issues
Convertible debt
Real investment options
Equity in levered firm - 20—
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- Degree Corporate finance Flashcards on 10. Options and options pricing, created by ciara.monaghan9261 on 14/05/2016.
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- ciara.monaghan9261
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