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

Chap+7+Slides+New+Mechanics+of+Options+Markets - FIN 480...

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

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)...
View Full Document

This note was uploaded on 03/23/2011 for the course BUSINESS bus 173 taught by Professor Rtm during the Spring '11 term at IUP.

Page1 / 20

Chap+7+Slides+New+Mechanics+of+Options+Markets - FIN 480...

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online