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CHAPTER SIXTEEN OPTIONS MARKETS CHAPTER OVERVIEW This chapter describes characteristics of options, terminology used in the options’ markets, payoffs and profits to option owners and writers, and the put call parity relationship. Also discussed are option-like assets, such as callable bonds, warrants, and collateralized loans. LEARNING OBJECTIVES After studying this chapter, the student should be able to calculate potential profits resulting from various option trading strategies and to formulate portfolio management strategies to modify the risk-return attributes of the portfolio. The student should also understand the put-call parity relationship, and be able to identify the embedded options in various assets and to determine how these option characteristics affect the prices of these assets. PRESENTATION OF CHAPTER MATERIAL 1. Option Terminology and Types of Options Basic terminology used with options is displayed in T 16-2. Discussion of this terminology assists in presentation of pricing and put-call parity relationships that are covered later in the chapter. T 16-2 Option Terminology The market and exercise price relationships are presented in T 16-3. T 16-3 Market and Exercise Price Relationships An American option can be exercised at any time prior to expiration or maturity. A European option can only be exercised on the expiration or maturity date. Most options that are traded in this country are American options. Foreign currency options stock index options that trade on the Chicago Board Options Exchange are exceptions. T 16-4 American vs European Options
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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.

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