MGMT310_lecture24

MGMT310_lecture24 - Last Lasttimewediscussed

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st time we discussed… Last time we discussed… Use of derivative securities (hedging, speculation) Forwards/futures/options
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Microsoft snapshot (4/12/2010) Underlying stock price was $30 + some change Highlighted options are in the money
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hat is an ESO and how does it differ? What is an ESO and how does it differ? ESO = Employee Stock Option An option granted to an employee by a company giving the employee the right to buy shares of stock in the company at a fixed price for a fixed time. How does ESO differ from the call options we’ve discussed? Not traded, can’t be sold Longer expiration date Has vesting period Dilutes existing shareowners’ stake when exercised
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etermining option value Determining option value You want to price a European call on stock X, which currently trades at $100 per share. The option expires in one period, and has a strike price of $100. The risk ee rate over the next period is 5% (assume you can lend and borrow at free rate over the next period is 5% (assume you can lend and borrow at riskless rate) Suppose there are two possible outcome for share prices of stock X next period: It can go up by 10% or it can drop by 10% 1. Let’s form a tracking portfolio! 2. Now let’s try it another way: the risk neutral approach!
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ulti ep tree Multi step tree Limiting ourselves to two possible outcomes is not as restrictive as it seems Let’s just increase the number of steps in our tree! i.e., break down time to expiration into T steps, where stock price can either increase or decrease by X% in each step Then we can price the option working our way backwards from the end of the tree
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MGMT310_lecture24 - Last Lasttimewediscussed

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