Lecture Note Three_Tsing Hua_2009 - Lecture Note 3 Options...

Info icon This preview shows pages 1–13. Sign up to view the full content.

View Full Document Right Arrow Icon
Corporate Finance Lecture Note 3 1 Lecture Note 3 Options and Corporate Finance
Image of page 1

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

View Full Document Right Arrow Icon
Corporate Finance Lecture Note 3 2 What is in This Note? Overview of Types of Options Overview of Binominal Option Pricing Overview of The Black-Scholes Model Overview of Debt and Equity as Options Reference: Chapter 22 of RWJJ, Chapters 20 and 21 of BMA
Image of page 2
Corporate Finance Lecture Note 3 3 Please review Options, Futures, and Other Derivatives, Six Edition, by John C. Hull, Prentice- Hall, 2006, Chapters 8, 9,11, 12, and 13 Please review your class notes on o°° ,
Image of page 3

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

View Full Document Right Arrow Icon
Corporate Finance Lecture Note 3 4 Understand Option
Image of page 4
Corporate Finance Lecture Note 3 5 Roadmap Understand option terminology Options Call Options Put Options Combinations of Options Be able to determine option payoffs and profits
Image of page 5

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

View Full Document Right Arrow Icon
Corporate Finance Lecture Note 3 6 Options An option gives the holder the right, but not the obligation , to buy or sell a given quantity of an asset on (or before) a given date, at prices agreed upon today. Exercising the Option The act of buying or selling the underlying asset Strike Price or Exercise Price (K) Refers to the fixed price in the option contract at which the holder can buy or sell the underlying asset Expiry (Expiration Date:T) The maturity date of the option
Image of page 6
Corporate Finance Lecture Note 3 7 Options European versus American options European options can be exercised only at expiry. American options can be exercised at any time up to expiry. In-the-Money Exercising the option would result in a positive payoff. At-the-Money Exercising the option would result in a zero payoff (i.e., exercise price equal to spot price). Out-of-the-Money Exercising the option would result in a negative payoff.
Image of page 7

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

View Full Document Right Arrow Icon
Corporate Finance Lecture Note 3 8 Option Traders Buyer Seller Call option Right to buy asset Obligation to sell asset Put option Right to sell asset Obligation to buy asset
Image of page 8
Corporate Finance Lecture Note 3 9 Call Options Call options gives the holder the right, but not the obligation, to buy a given quantity of some asset on or before some time in the future, at prices agreed upon today. When exercising a call option, you “call in” the asset.
Image of page 9

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

View Full Document Right Arrow Icon
Corporate Finance Lecture Note 3 10 Call Option Pricing at Expiry At expiry, an American call option is worth the same as an European option with the same characteristics. – If the call is in-the-money, it is worth S T K. If the call is out-of-the-money, it is worthless: C T = Max[ S T K , 0] Where S T is the value of the stock at expiry (time T ) K is the exercise price. C T is the value of the call option at expiry
Image of page 10
Corporate Finance Lecture Note 3 11 Call Option Buyer’s Payoffs at Time T: C T = Max[ S T K , 0] –20 120 20 40 60 80 100 –40 20 40 60 Stock price ($) Option payoffs ($) Buy a call Exercise price = $50 50
Image of page 11

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

View Full Document Right Arrow Icon
Corporate Finance Lecture Note 3 12 Call Option Buyer’s Profits Time T : C T C 0 or C T C 0 e rT Exercise price = $50; option premium = $10 Buy a call –20 120 20 40 60 80 100 –40 20 40 60 Stock price ($) Option payoffs ($) 50 –10 10
Image of page 12
Image of page 13
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern