FBE459_3_1_Options_Introduction

FBE459_3_1_Options_Introduction - FBE 459 Financial...

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FBE 459 – Financial Derivatives Prof. Pedro Matos Lecture 3.1: Introduction to Options Types of Options Institutional Aspects Readings: HULL chapter 9
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2 - Call and Put Options - Positions on Options - Institutional Aspects: - Underlying assets, trading, margins, etc. - Other Commonly Found Forms of Options Lecture Outline:
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3 Types of Options Call Option : gives the holder the right, but not the obligation, to buy an asset (the underlying - S) at or before a certain date (maturity or expiration date – T) for a certain price (strike price K).
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4 Types of Options Underlying = 1 eBay stock (S) ; Strike price K = $100 ; Option life T= 2 months ; Call Premium = $5 30 20 10 0 -5 70 80 90 100 110 120 130 Profit ($) Terminal stock price (S) Buying a Call (Long position):
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5 Types of Options A Long Call Option is different from Long Forward position because has the right to buy the asset but does not have to exercise this right: - if S < K ( “out-of-the-money”): investor will not exercise - if S = K ( “at-the-money”) - if S > K ( “in-of-the-money”): investor will exercise Buying a Call (Long position):
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6 Types of Options Underlying = 1 eBay stock (S) ; Strike price K = $100 ; Option life T= 2 months ; Call Premium = $5 Selling/Writing a Call (Short position): -30 -20 -10 0 5 70 80 90 100 110 120 130 Terminal stock price (S) Profit ($)
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7 Types of Options Put Option
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FBE459_3_1_Options_Introduction - FBE 459 Financial...

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