Week 11_Options - Options Pricing and Hedging Overview Last...

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Options Pricing and Hedging
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Overview ± Last time we covered ² the yield curve ² Interest rate risk and how it effects bond portfolios ± Today we will consider ² Option contract, trading, and payoffs ² Option strategies ² Put-call parity ² Option pricing models ² Hedging
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Term structure of interest rates and the Yield Curve ± Term structure refers to yields at different maturities (terms) ± the yield curve the relationship between YTM and time to maturity 1 234 8% 9% 10% Years to Maturity YTM
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Macaulay Duration/ modified duration ± A weighted average maturity of cash flows; a dollar-weighted time ± The price impact of changes in YTM, a sensitivity factor: ± Modified duration y ] 1 ) y 1 [( c ) y c ( T y 1 y y 1 P ) y 1 ( CF t w t D T T 1 t 0 t t T 1 t t + + + + + = + × = × = = = y 1 y D P P + Δ × = Δ D*= D/(1+y)
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Duration Principles ± Duration is inversely related to coupon rate and YTM ± Duration generally increases with time to maturity ± Duration of a perpetuity is (1+y)/y ± Duration of an annuity is 1 ) y 1 ( T y y 1 T + +
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6 Text reference ± This week lecture: Chapter 20 & 21 ² Tutorial problems due this week: ± Ch15: 1-5, 7, CFA: 1-3 ± Ch16: 1-7, 10-12, CFA: 2-4, 8 ± Next Week lecture: Chapters 22 & 12 ² Tutorial problems due next week: ± Ch20:1-3,5,6 ± Ch21: 6, 11-13, CFA: 2, 3c
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Payoffs and Profits ± The payoff is the value of the option contract at expiration (gross payoff). ± The profit is the payoff less the cost of acquiring the option (net profit). ± Buy a call with strike=50. The call costs 2. At expiration, the underlying is S=55. ² The payoff is 55–50=5. ² The profit is 5–2=3.
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Payoffs at Expiration to Call Holders Spot Price, S T 0 -C X Profit=S T -X-C Payoff=S T -X ± Payoff = max(0, S-X), Profit = max(0, S-X)-C ± Payoffs to call writers?
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Payoffs at Expiration to Puts Holders Spot Price,S T X 0 -P Profit Payoff ± Payoff = max(0, X-S), Profit = max(0, X-S)-P ± Payoffs to put writers?
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±
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This note was uploaded on 05/02/2010 for the course ACCT 3756 taught by Professor Leung during the Three '09 term at University of Sydney.

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Week 11_Options - Options Pricing and Hedging Overview Last...

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