IFM10 Ch06 Show - Chapter6 FinancialOptions 1...

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  1 Chapter 6 Financial Options
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2 Topics in Chapter Financial Options Terminology Option Price Relationships Black-Scholes Option Pricing Model Put-Call Parity
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3 What is a financial option? An option is a contract which gives its  holder the right, but not the obligation,  to buy (or sell) an asset at some  predetermined price within a specified  period of time.
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4 What is the single most important characteristic of an option? It does not obligate its owner to take  any action.  It merely gives the owner  the right to buy or sell an asset.
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5 Option Terminology Call option:  An option to buy a specified  number of shares of a security within  some future period. Put option:  An option to sell a specified  number of shares of a security within   some future period.
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6 Option Terminology Strike (or exercise) price:  The price  stated in the option contract at which  the security can be bought or sold. Expiration date:  The last date the  option can be exercised. 
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7 Option Terminology  (Continued) Exercise value:  The value of a call  option if it were exercised today =  Current stock price - Strike price.  [Note:  The exercise value is zero if the  stock price is less than the strike price.] Option price:  The market price of the  option contract.
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8 Option Terminology  (Continued) Time value: Option price minus the exercise  value. It is the additional value because the  option has remaining time until it expires. Covered option:  A call option written against 
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This note was uploaded on 09/01/2010 for the course LAW 567 taught by Professor A.moorty during the Spring '10 term at Anna University Chennai - Regional Office, Coimbatore.

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IFM10 Ch06 Show - Chapter6 FinancialOptions 1...

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