Lecture 32 - Agenda LC:CoveredCall,Preexpirationvalues...

11/17/2010
1
Financial Economics
Lecture 32
Economics 3330
Cornell University
November 17, 2010
Agenda
• LC: Covered Call, Pre ‐ expiration values
– Begin Chapter 21
• TC: Pre ‐ expiration values, Binomial Options
• NC: Black ‐ Scholes
• Lectures 34 ‐ 36 on Performance Evaluation and
Hedge Funds drawn from Chapters 24 and 26
• Final lecture will be a review
• PS 10 due 12/2 to be posted soon
Pre ‐ Expiration Call Price Bounds
• Observation: Price C of
call should always be
less than that of stock
itself
• Observation: Based on
constructed portfolio
that was (weakly) worse
than option
C > S
0
‐ PV(X) ‐ PV(D)
• Need more structure to
actually know C
Pre ‐ Expiration Call Price
(Illustrative)
• Less likely that the asset
price will be below
exercise price at
expiration as current
price increases
• Thus, C moving closer
to S
0
‐ PV(X) ‐ PV(D) on
graph as S
0
increases
• How does slope
change?