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...

• Notes
• 20

This preview shows page 1 - 9 out of 20 pages.

Chapter 11 Properties of Stock Options 1
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)
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.
4 European call price ( c ) European put price ( p ) 2. Strike price ( K ) +
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
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?
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
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

#### You've reached the end of your free preview.

Want to read all 20 pages?

• Spring '15

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern