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Lecture%2011_student_6slides

# Lecture%2011_student_6slides - What will happen next week...

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1 FIN 221 Lecture 11 CH 20: Options and Corporate Finance 1 What will happen next week? Revision Lecture Provision of further information on the final exam Teaching Evaluation 2 Good-Bye Moment Company A Cost Payoff D A =30% E A =70% =0.3V =0.7V X=0.01 =1% -X E A =-0.01 *0.7V =-0.007V (C- D A k d ) X = 0.01(C -0.3V *k d ) = 0.01C -0.003V *k d Company B D B = 10% E B =90% =0.1V =0.9V -X E B =(-0.01* 0.9V) +(0.01* 0.2V) =-0.007V =1% D A - D B =0.01(C -0.1V *k d ) -0.01*k d * 0.2V =0.01C -0.003V *k d (C- D B k d ) X ( D A -D B ) k d X - +X( D A -D B ) Relevant Reading Chapters • 20.1 Call options Put options American, European options • 20.2 4 Variables that affect option values The binomial option pricing model ( Note: Stu dy the method shown in the lecture) Put Call Parity Derivative Instruments Another form of financial instrument – What we’ve been focusing on thus far is ___ instruments whose value is determined directly by markets Eg) Debt – Bond, Equity – Ordinary shares – Another form? What is called “ _________ instruments” 5 which derive their value from some other financial instruments ( ________ assets) Eg) Forward, futures and options An agreement which provides that something will be bought or sold in the future at a fixed price – The price is determined ______ – The transaction is to occur ______ Options contract An agreement which provides the holder the ____ , but not the obligation to buy or sell an asset in the future at a price which is determined today – ____ option: right to ____ an underlying asset at a predetermined price (= _______ price = strike price) option: right to an underlying asset at a 6 ____ right to ____ predetermined price – ________options: options that can be exercised on the expiry date – _________options can be exercised at any point in time on or before the expiry date

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2 Eg) On 28 Oct 2004, the closing price of the ‘ Dec 14.00 ’ series of call options on the shares of BHP was \$0.76 . The closing price of BHP shares on the same date was \$14.34 The expiry date for the option is 23 Dec 2004. Suppose each option contract covers 1000 shares Options contract (Call Option) Expiry month Exercise price=X Underlying asset 7 Buyer of call option •28 Oct 2004, the buyer decided to buy one call option contract by paying __________________________ •The buyer has the right to ____ 1000 BHP Shares - at any time b/w 28 Oct and 23 Dec 04 - on expiry date (and not before) at an
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