im-17-4e - CHAPTER SEVENTEEN OPTION VALUATION CHAPTER...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
CHAPTER SEVENTEEN OPTION VALUATION CHAPTER OVERVIEW This chapter discusses factors affecting the value of an option, determination of option pricing in a two- state world (binomial option pricing), hedge ratios, and the Black-Scholes option pricing model. Portfolio insurance techniques are also presented. LEARNING OBJECTIVES After studying this chapter, the student should have a thorough understanding of the factors affecting option prices, be able to compute option prices in the two-scenario model of the economy (binomial option pricing), compute the Black Scholes value of an option, compute hedge ratios, and construct portfolio insurance strategies using option hedge ratios. PRESENTATION OF CHAPTER MATERIAL 1. Overview of Option Valuation The concept of intrinsic value was developed in Chapter 16. T 17-2 describes the concept of time value of an option building on these concepts. A graph that compares the intrinsic and time value of a call option is displayed in T 17-3. T 17-2 Option Values T 17-3 Time Value of Options: Call The factors that will have influence on the value of a call option are described in T 17-4. The relationship between the first two factors determines the intrinsic value. Other factors constant, the higher the stock price the higher will be the value of the call. Other factors constant, the higher the exercise price the lower will be the value of the call. Options on stocks with greater volatility will be more valuable than options on lower volatility stocks. The payoffs from the call are not symmetric. The
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 10/28/2009 for the course MBA MBA608 taught by Professor Martin during the Spring '09 term at Beirut Arab University.

Page1 / 3

im-17-4e - CHAPTER SEVENTEEN OPTION VALUATION CHAPTER...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online