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Finance-lecture11

Finance-lecture11 - (J...

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Unformatted text preview: (J WLLLLMEJZ__._fl!’7L/0W§51Vlfl{flé7lm¢au .A ,. WW 6/5 / 3 12“" C/f/‘rdfiuwfi hawk? fig’W‘t/LLTAWQQALL'K aéiwt £9 ”*2 7mm“ ”170% ’ film [WV ' ~ WWW ngm em Maw/cm w M m Ceepflccf’ Mfipyn €4ng Wm, flu; me pm 7442 Zia/r 7!” #31131 fflw‘fl‘MW/wae m/L‘ofitfi Zia/3:4 flaw-Z M/flfli, . #2!) gym , * ‘ (3% 371%?” 7 A? yfiVQWWM/L , A 4% fléw'ce ,Mam Wffii‘m i 1W1! j if? a way; Mimi/fawn 27; fig 4m 7% Mien. I An mm 2 W49 4 Wmf M I 2% L; mmmmwa Mira/Ti? 5% M. @53ch 62% (ill/:4 MAW/5L @Lo/W/j Mowi‘m? far/7&4 allow/6,) M “/er [mg m a 152%“ m Wm; aid WW 7% 24% 14¢me , 72$ '9’ Cpmmm e’m no; ”/275014‘ new/4' 4 mm 7% Lame m oWW-mfid ”Wm/W {/mmm MLQ 4/100r/k fdhg 071 or fig“ affix», 0&2; _ . 79W &] 5‘1 CW MM» .m/wZ/Lé/IW [WW 52 fig byk [/wgmg; fiz/Wadfim). ' _ ' ‘ ' ' WW 7% him my M M W uffim‘flda a? 0L 4/95/1' era/cg 0‘“ 0” “/7154 5% 71mm M» i[ff/W )Zq Mafia/m fwa}7‘lxy¢v)flr/Mfle/w /M/Ua Efw 05W (4% Midfield. ' ' #051: 470%? W WWW if MSG/I'vWWZJ WWW 7”” ' ’"f 744 afem 6&4;va WGMM [gee lea/W0 /)« . C2) 7% (2)030an [#QU/VM/ce 547 wag/id: gag/”a/nfl/zuflarhw iii/MI“ mm mm; 12 62/7 at W flw Mm; ma? mm A) MGM? W SM/W'W 70522 0%? WA 02% 0y” /7wf;71jimxpy A/Mé 1:3 1€MWL 4’01 ”UK flvEMOLZAW7‘ 47/056 w I BM» COW 0W4. fluofl “+90% M [WW/7M! fl/Mgf $7204 4/1/i7} -' MW w W M WW 7 M WW 7511 WVoéJ/IQ Zfixéwf 971/770»: flogwpfe 77A (WMM éfiwwa 14‘ M W - 4M AIM/p62 p/WL 0LT”); 7140/2 an a Comma/z «€54 14~ 7wg¢§ m 56>. 22222222222222 222,222 [22: 22 2 2.22222. 2:22 2222 22222222 2'2 swat 2;.) W -.QU.[—Qg.2gwgz ‘07”)-—>UW1&_1/,M£W .-. -. -2242- 222222.22- 92‘242/2'2. 22-5-2221... $22-22- ,2flu M2222 22292221 1; ..ATM)..-. .fiV'uA: fluu, [Cu flyfto» M... 94¢! [22 (“+7 is) M W M law/1.04%.? fir My 74:714.; ) m 775““ W W/ A, , , 1 , 5, t . 1‘ 099d {fig/{4W 714m”, ”kt/flyfluéy mag a <74)!“ /"/l}u" 4/ 7’; CV'L C“) 67/244 “trim flw {yfllm h (7‘ F “/77 (SW44 /oi'w > MW WMQ(/74/Lp) / fit (Lacé( ) flu firm WW 3716? {am a S’Wfldg pact/flap l/Eé-W M“ j ‘\ ¢ , l a; ,. [jean/j, KL. ,1”wa [4 flaw Mil/7w”? «éffj—I 7490? M fizz/7’75 . [4 féééiAz/éxf ,flw/d? flu? 47271: M “4252/7 fligi m‘ 0% /%l% Z— /W M2. /‘7¢i"714/m by me»! flm ”WWW, (Moi/77 s f- 474/‘4 4 I} vast/Du ( 52 (A; /&;;Wg/{ w} mm 0/4ng a (72 . J EXAMPLE OF A CALL OPTION: Bill wants to buy 100 shares of Canadian Tire Company from Wanda for $50 per share at any time dur'ing the next 6 months. Currently, Canadian Tire is selling for $45 on an organized exchange. Bill thinks the _ share prices will rise above $50 over the next 6 months. Wanda thinks the stock price will remain below $50 over the same time period. - ' Bill is the option BUYER, Wanda is the option WRITER. Writer's risk: If Wanda is wrong and the share prices rise above $50, she will have to buy the shares at the high price and sell them to Bill for $50. $0 Bill has to pay Wanda an option premium: , possibly $3 per share for a total of $300. This is really the price of the call option. Why doesn't Bill just buy theshares? Because this way he only pays $3 per share for theOPTION to buy, whereas purchasing the shares outright would cost him $45 per share. - - ' . ’ Wanda, the option Writer, can get out of the contract tWo ways: 1. She can buy it back from Bill. If the share prices have gone Lip, say to $55, she could pay Bill $7 per share or $700 total. Wanda loses $300-$700=$400. Bill makes $700-$300=$400. If the shares have gone down,_ say to $40, Wanda might pay Bill something like $0.50 per share or $50 total. Wanda makes $300-$50=$250. Bill loses $300—$50=$250. C?3 2. She can Sell the contract to somebody else who then becomes the new . option writer. This would be done through the CDCC and would be called a 'c'losing purchase" because it onld be done by entering into an offsetting transaction. The price would depend on the amount of time left before the expiration date and the volatility of the stock. Wanda will have "unwound" her position and is no longer involved in the contract. Bill, the option Buyer, can also get out of the contract by selling it to somebody else who then becomes the new option buyer. This would be done through the CDCC and would be called a "closing sale". The price would depend on the amount ' of time left before the expiration date and the volatility of the stock. Bill will haVe "unwound" his position and' Is no longer involved' In the contract. EXAMPLE OF A BUT OPTION: In this case Bill wants to sell 100 shares of Air Canada stock for $30 per share any time in the next 6 months. Currently Air Canada is selling for $35 per share on an organized exchange. Bill thinks Air Canada share prices will fall below $30 over the next 6 months. Wanda thinks Air Canada shares will not fall below $30. _ Wanda's risk as the writer of the put option is that if the Air Canada shares fall below $30 she would have to buy the shares from Bill at $30 when they are not worth that much. The buyer of the put option has to pay the writer a "premium"' In order to get the writer to assume the risk. As with call options the buyer andCWriter may unwind their positions at any time by simply entering an offsetting transaction, which is easily done because contracts are standardized and the CDCC is used. If a buyer chooses to exercise an option, the CDCC will randomly choose a writer who has not closed his or her position and assign the exercise notice accordingly. Example of motive for buying‘a call contract: if you buy a call contract for stock X with a strike price of $50, if the price of the stock rises to say $60. you have the right to buy the number of shares specified in the call contract for $50 each. Then you can resell them for $60. Your profit is the difference between the'$10 price differential and the price you paid for the option contract. Example of motive for buying a put contract: , If you buy a put contract for stock X with a strike price of $50, if the price of the stock falls to say $40, you can buy the shares for $40 and sell the number of shares specified in the put Option contract for $50'each. Your profit is the $10 price differential and the - price you paid for the option contract. N07); flufl 710 immflm M flit/11179.21 m4 ["1ng flaw/1mg 9! @Lflgiu]_ FM %WWT til-407%? W1 1; Mia Ljfvwflizélflé. 42.2. Wv/mfi‘an 4 @750)” 5110510 0/1494 j .WL Mi aflmyr £3 03/ \ I "50ch MdI/W/LWE . “ml” ”11 /1 1évmé7fli1¢ flu»? 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(«186 CWCWL T’W’mium Alt WWTW MM PM <cwu2 “lama $06041 Mmjw W 0'— 73/40/3er (”5% wanKac WM) 1% Wu 0&an [/5an law 4rd YCLE will Moi/4 film W Maia/1:41; WC mo 43— PM rmd) wagjmrg " ' MIR Lea/JIM m Mama/g $6M? orb/Tam [fixcm Lt lid/Mac v F744 Will/LOT? ‘1 yl/ll‘fT/MAQ Val/Lu (4 will}: 71/1050 MUM/L 0156 Wu 4mm FmLQ. Lay we VOLT/LL? Q W ' MYTVICTC 1/601ng;01 PW?” @0th DIZTLDh ‘ K 3 _ 6, an > S we (*4:— E& ‘C— To “t; W - <37 PROFITS & LOSSES on CALLS & PUTS: . In each case below, assume the underlying stock is selling for $100 at "the time the option was initially bought or written and the exercise price (E)'is also $100. Assume the prices of all contracts is $5 per share. ($5 premium paid to writer.) Profit _ BUY A CALL (Long Call $100$l05 Ps Call option buyer pays the writer $5 per share. Buyer only makes a profit if share price rises above $105. Profit is IV - premium. Profit _ BUY A PUT (Long Put) $95 $100 PS If the share price is below $100 . put buyer can buy shares at low price and sell for $100, but profit is IV - $5 premium paid to writer. So need share price to fall below $95. Profit _ WRITE A CALL (Short Call) $100$10$ Ps Call option writer gets $5 per share up front. lf share price rises above $100 has to buy the shares at the high price ‘ ' and sell to the option buyer for $100. Profit _ WRITE A PUT (Short Put) $95 $100 . Ps Writer locks in $5 per share. as long as price is $100 or higher. If share price is below $100, and the buyer exercises the option, Writer has to buy shares for $100 even though they are worth less. The $5 option premium partly offsets the loss. (a?) Examfla i \- ’ V3?“ W Gin/M mug Mbwavg WYWwDTw-in m 13an 1;! 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