Chapter 22 - Options and futures

Chapter 22 - Options and futures - Chapter 22 Options and...

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Chapter 22 Options and Corporate Finance: Basic Concepts 22.1 Options an option is a contract giving its owner the right but not the obligation to buy or sell an asset at a fixed price on or before a given date exercising the option - act of buying/selling underlying asset via the option contract striking or exercise price - fixed price at which holder can buy/sell underlying asset expiration date - maturity date of the option; after this date, the option is dead American options can be exercised at any date up to the expiration date, whereas a European option can only be exercised at the expiration date 22.2 Call Options Call option - gives the owner the right to buy an asset at a fixed price during a particular time period o no restriction on kinds of assets, but usually on stocks and bonds o individual investors are the original buyers and sellers of call options The Value of a Call Option at Expiration o depends on the value of the underlying stock at expiration o if stock price is greater than the exercise price, the call is “ in the money o if stock price is smaller than the exercise price, the call is “ out of the money →holder will not exercise its right but will walk away o value of call at expiration is referred to as the hockey-stick diagram of call-option values → Call value = Stock price – Exercise Price o if it is worth less than the exercise prices →worthless o if the stock price is greater →the call is in the money and its value rises one- for-one in the stock price o call can never have a negative value → limited-liability-instrument ( can lose only what invested) 22.3 Put Options o Put option - gives the owner the right to sell an asset at a fixed price during a particular time period The Value of a Put Option at Expiration o Pretty much the opposite circumstances that hold for calls since a put gives the owner the right to sell shares o depends on the value of the underlying stock at expiration o holder will only exercise , if price of stock is lower than his exercise price → Put value = Exercise price – Stock price o for every dollar that the stock price declines at expiration → value of the put increases by one dollar 22.4 Selling Options 1
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Chapter 22 Options and Corporate Finance: Basic Concepts an investor who sells (or writes ) a call option promises to deliver shares if required to do so by the call-option holder (obligated to do so) if at expiration date, the price of common stock is greater than the exercise price , the holder will exercise the call and the seller must give the holder shares of the stock in exchange for the exercise price seller loses eventually money, but is paid to bear this risk – on the day of the option transaction →receives price paid by buyer buying a stock is the same as buying a call option with an exercise price of zero 22.5 Reading the Wall-Street Journal o first column tells closing price per share at previous day o second column tells the strike price
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This note was uploaded on 11/16/2009 for the course F 3033 taught by Professor Hh during the Spring '09 term at Maastricht.

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Chapter 22 - Options and futures - Chapter 22 Options and...

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