19261394-EPMI-Investment-Analysis-09

19261394-EPMI-Investment-Analysis-09 - Executive Programme...

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Investment Analysis 2009 Prof P. Sen Class Notes 9 Indian Institute of Management Calcutta Executive Programme In Management And Insurance
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Options Markets OTC Markets Exchanges Options Clearing Corporation : National Securities Clearing Corporation Limited (NSCCL) – as a middle layer between buyer and seller
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Options Trading OTC Markets Customized Comparative low volumes Higher costs Exchanges Most of the trading High degree of standardization – market participants trade in a limited and uniform set of securities Contracts involve buying and selling of 100 shares Adjustments take place for stock dividends and stock splits Quotations show both “ in the money ” and “ out of money ” contracts
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Adjustments Bonus issue ( stock dividend ) If ratio is m:n, new strike price = p * n / (n+m) Rights issue Ration = m:n Issue price = R Old exercise price = X New exercise price = (nX + mR) / (m + n)
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Options Trading – Continued Exchanges (contd) Normal to see offsetting quotes: higher price for puts would mean lower price for calls . Discrepancies may occur because of trades taking place at different times Maturities tend to be relatively short – THREE months. However, for example in the US there can be longer term options too – typically based on larger company securities or indexes – LEAPS ( L ong Term E quity A ntici p ation S ecurities) Option Types Options traded in India are European Options. In the US most of the traded options in the US are American Options, though there are some exceptions – Foreign Currency options and Stock Index options
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NSE NIFTY Options European Style Trading Cycle : 3 month trading cycle – the near month (one), the next month (two) and the far month (three) Expiry Day : Last Thursday of the expiry month. If the last Thursday is a trading holiday, then the previous trading day. Permitted Lot Size : 200 Strike Price Interval : 10
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Options Trading – Option Clearing Corporation 1. Clearinghouse for options trading –owned by the exchanges (NSCCL owned by NSE) 1. After deal is struck, OCC places itself between the two traders – positioning itself as the effective buyer and seller. 1. All individuals therefore have to deal only with the OCC 1. OCC guarantees contract performance. 1. Margin requirements for writer. The extent is determined by : Whether and to what extent the option is trading “ in money ”. The extent determines the margin needed. Extent of margin is influenced by other securities in the investor’s portfolio. For example if the call option writer has the underlying stock then that can be held as part of the brokerage account
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Options Trading Type of Options Index Options http://online.wsj.com/documents/inions.htm Futures Options Foreign Currency Options Interest Rate Options Reference : http://online.wsj.com/documents/mktindex.htm
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Options Trading– Type of Options (contd) Exotic Options Asian Options
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This note was uploaded on 02/28/2010 for the course MBA 87 taught by Professor Dpg during the Spring '10 term at Indian Institute Of Management, Kolkata.

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19261394-EPMI-Investment-Analysis-09 - Executive Programme...

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