Ch11.0.pptx - Chapter 11 Properties of Stock Options 1 11.1 Factors Affecting Option Prices(Table 11.1 European European American American call price

Ch11.0.pptx - Chapter 11 Properties of Stock Options 1 11.1...

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Chapter 11 Properties of Stock Options 1
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2 European call price ( c ) European put price ( p ) American call price ( C ) American put price ( P ) 1. Current stock price ( S 0 ) + + 2. Strike price ( K ) + + 3. Time to expiration ( T ) ? ? + + 4. Stock price volatility ( s ) + + + + 5. Interest rate ( r ) + + 6. Dividend ( D ) + + 11.1 Factors Affecting Option Prices (Table 11.1)
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3 European call price ( c ) European put price ( p ) 1. Current stock price ( S 0 ) + Figure 11.1 Effect of changes in stock price on option prices when S 0 =50, K =50, r =5%, s =30%, and T =1.
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4 European call price ( c ) European put price ( p ) 2. Strike price ( K ) +
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5 Assume stock price follows random walk Feb Mar Apr Jul Why? Maturity Strike price $130 Maturity Call price Maturity Put price Price $135.32
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6 American call price ( c ) American put price ( p ) 3. Time to expiration ( T ) + + Exception for European options: what if there is a large dividend in-between?
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7 European call price ( c ) European put price ( p ) 4. Stock price volatility ( s ) + + Figure 11.2 Effect of changes in volatility on option prices when S 0 =50, K =50, r =5%, s =30%, and T =1. Call owner benefits from price increases but has limited loss in price declines
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11.3 Upper Bounds for Option Prices 8 Today At Expiration if S T > K if S T K short call c −( S T K ) 0 buy stock S 0 S T S T sum c S 0 K S T Today At Expiration if S T K if S T < K short put p 0 −( K S T ) invest money Ke rT K K sum p Ke
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  • Spring '15
  • Mohammad M. Mousavi

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