Options and Corporate Liabilities

Options and Corporate Liabilities - UGBA103 Avinash Verma 1...

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Unformatted text preview: UGBA103 Avinash Verma 1 UGBA 103 Options and Cor por ate Liabilities UGBA103 Avinash Verma 2 Options: Calls and Puts A Call option gives its holder the right to buy a certain asset (the underlying ) on or before a certain date ( maturity or expiration date) for a fixed price (the strike or exercise price) A Put option gives its holder the right to sell the underlying on or before the maturity date for the strike price UGBA103 Avinash Verma 3 Amer ican and Eur opean Options If an option can be exercised only on the maturity date, its known as a European Option; if it can be exercised on as well as before the maturity date, its known as an American Option Thus, we have four kinds of options: an American Call ( AC ), a European Call ( EC ), an American Put ( AP ), and a European Put ( EP ) UGBA103 Avinash Verma 4 Calls and Puts In order that the holder (buyer) of the contract may have the option , the other party, known as the writer (seller), must assume an obligation . The holder compensates the writer for assuming the obligation by paying her a premium (option price). You are said to write an option when you sell to open a contract. 5 Notation We shall denote the price of the underlying asset as A , the strike price as K , the price of the European Call as EC , and that of European Put as EP . Unsubscripted prices pertain to current time....
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Options and Corporate Liabilities - UGBA103 Avinash Verma 1...

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