InvestmentPlanningWeek9_2 - FSU Certificate in Financial...

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FSU Certificate in Financial Planning Investment Planning © Florida State University Page 1 Lecture Title: Week 9: Options, Option Pricing and Strategies, Commodity and Financial Futures Week 9: Derivatives Introd uctio n Last week we came down the backstretch with our study of bonds. Now, we round the slippery final turn with derivatives. Next week, we'll be heading for home as we bring it all together with portfolio management. Be sure-footed this week, there's a lot to cover, and then the finish line will be in sight. Objectives At the end of this lecture, you will be able to: 1. Define the terminology inherent to the options market, including strike price, intrinsic value, time premium and expiration date. 2. Differentiate between various put and call investment strategies and be able to identify the risks associated with them. 3. Explain the relationship between options and the price of the underlying stock. 4. Understand the use of the Black-Scholes option valuation model as a tool in pricing options. 5. Differentiate speculative from risk management strategies using options. 6. Define a futures contract and explain the differences in various short and long positions. 7. Identify the factors determining the pricing of a futures contract. 8. Demonstrate how both speculators and hedgers use futures contracts to prosper. Lecture Presentation If you check the syllabus for the Certified Financial Planner™ Certification Examination Topics pertaining to options and futures which are covered by this week's reading, you'll see there aren't that many. Certified Financial Planner Board of Standards Inc. (CFP Board) wants you to really know the basics of options and futures and thoroughly understand the various relationships of those products. They want you to be able to
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FSU Certificate in Financial Planning Investment Planning © Florida State University Page 2 explain why and how various strategies can be used for either speculation or risk management. You are required to be able to determine the investment return or loss on transactions. That's a lot of information to absorb and most of it is found in Chapter 17. The good news is CFP Board does not require you to have the knowledge of a Registered Options Principal in order to meet the learning objectives they impose. Some of the information found in Chapters 18 and 19 exceed what is required of you. While I expect you to read all three chapters, put your primary focus on Chapter 17. Likewise, my lecture notes will be more concentrated on the principles discussed in that chapter. Content Presentation Chapter 17 A derivative is a security based on another asset and its value is based upon the value of that underlying asset. An option is a derivative. It is a contract that gives the holder the right to buy or sell an underlying security at a specified price within a specified time period. As we will see, options can be used to speculate on price movements in stocks or to reduce risk by hedging a stock one owns.
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