Week 12_Futures and Behavioural Finance

Week 12_Futures and Behavioural Finance - Futures And...

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1 Futures And Behavioural Finance intro

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2 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?
3 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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4 Payoff and Price S T =+ X S T -X S 0 =c 0 -p 0 + PV(X) Range of stock prices (S T ) Payoff X X
5 Call Option Value before Expiration Spot Price, S X Intrinsic Value = S t -X Time Value Call option price at any t < T 6 months 3 months

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6 Pricing options The price of an option is the present value of the expected payoff. ± Payoff ± Probability ± Discount rate
7 Risk-Neutral Valuation ± Binomial option pricing: call option ± Black Scholes option pricing T f T f T ) r 1 ( C ) 1 ( C ) r 1 ( ) C ( E C + π + π = + = + C o = S o N(d 1 ) - Xe -rT N(d 2 ) P 0 = Xe -rT N(-d 2 ) - S 0 N(-d 1 ) where d 1 = [ln(S o /X) + (r + σ 2 /2)T] / ( σ T 1/2 ) d 2 = d 1 -( σ T 1/2 )

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8 Text reference ± This week lecture: Chapter 22 & 12 ² Tutorial problems due this week: ± Ch20:1-3,5,6 ± Ch21: 6, 11-13, CFA: 2, 3c ± Tutorial problems for this lecture: ± Ch22:1-6,8, CFA: 1-4 ± Ch12: 1-5, CFA: 1-4
9 Today’s lecture ± Futures and forwards ² Terms and Trading mechanisms ² Finding the futures price – the price of the asset to be paid in the future ² Valuing a forward contract ± Behavioural finance ² Risk aversion ² Biases and other errors ² Limits to arbitrage

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10 ± Forward - an agreement calling for a future delivery of an asset at an agreed-upon price ± Futures - similar to forward but with formalized and standardized characteristics ± Key difference in futures ² Secondary trading - liquidity ² Marked to market ² Standardized contract units ² Clearinghouse warrants performance Futures and Forwards
11 ± Futures price - agreed-upon price to be paid at

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Week 12_Futures and Behavioural Finance - Futures And...

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