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Chap+7+Slides+New+Mechanics+of+Options+Markets

Chap+7+Slides+New+Mechanics+of+Options+Markets - FIN...

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Unformatted text preview: FIN 480 (Instructor- Saif Rahman) Derivative Securities Chapter 7 Mechanics of Options Markets FIN 480 (Instructor- Saif Rahman) 1 portfolio t T S T 100 S T < 100 long call -premium ($3) S T-100 0 -premium ($3 100) 100 (S T –100) 0 long call: portfolio t T S T 100 S T < 100 long put -premium ($3.50) 0 100-S T-premium ($3.50 100) 0 100 (100-S T ) long put: Option payoffs Let us graph these payoffs FIN 480 (Instructor- Saif Rahman) 2 Profit= 100 { Max(0,S T- 100) less $3} S T Max(0,100-S T ) S T X=100 X is strike price Payoffs / profits Long Put option Long calls and puts on IBM stock Max(0,S T- 100) Long Call option Profit= 100 {Max(0,100-S T ) less $3.50} Payoffs / profits X=100 X is strike price options are non-linear contracts 103 96.50 FIN 480 (Instructor- Saif Rahman) 3 portfolio t T S T 100 S T < 100 Short call premium ($3) 100-S T 0 premium ($3 100) 100 (100-S T ) 0 short call: portfolio t T S T 100 S T < 100 Short put premium ($3.50) 0 S T-100 premium ($3.50 100) 0 100 (S T-100) short put: Graphing these payoffs: Option payoffs FIN 480 (Instructor- Saif Rahman) 4 S T Min(0, S T-100) S T X=100 X is strike price Payoffs / profits Short Put option Short calls and puts on IBM stock Min(0,100-S T ) Short Call option Payoffs / profits Profit= -100 { Max(0,S T- 100) -3} =100 { Min(0,100-S T )+ $3} Profit= -100 {Max(0,X-S T ) -3.50} =100 {Min(0, S T-100) + $3.50} X=100 X is strike price 103 96.50 FIN 480 (Instructor- Saif Rahman) 5 Payoffs European Option: long on calls: Max( S T-X,0) short on calls:-Max(S T -X,0)= Min(X- S T ,0) long on puts: Max(X- S T ,0) short on puts:-Max(X- S T ,0)=Min(S T -X,0) American Option: long on calls: Max( S t-X,0) short on calls:-Max( S t-X,0)=Min(X- S t ,0) long on puts: Max(X- S t ,0) short on puts:-Max(X- S t ,0)=Min(S t-X,0) Notice the time subscripts FIN 480 (Instructor- Saif Rahman)...
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Chap+7+Slides+New+Mechanics+of+Options+Markets - FIN...

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