mini-case-ch8

mini-case-ch8 - Chapter 8 Financial Options and Their...

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Chapter 8 Financial Options and Their Valuation MINI CASE Assume that you have just been hired as a financial analyst by Triple Trice Inc., a mid- sized California company that specializes in creating exotic clothing. Since no one at Triple Trice is familiar with the basics of financial options, you have been asked to prepare a brief report that the firm's executives could use to gain at least a cursory understanding of the topic. To begin, you gathered some outside materials the subject and used these materials to draft a list of pertinent questions that need to be answered. In fact, one possible approach to the paper is to use a question-and-answer format. Now that the questions have been drafted, you have to develop the answers. a. What is a financial option? What is the single most important characteristic of an option? Answer: A financial option is a contract which gives its holder the right to buy (or sell) an asset at a predetermined price within a specified period of time. An option’s most important characteristic is that it does not obligate its owner to take any action; it merely gives the owner the right to buy or sell an asset. b. Options have a unique set of terminology. Define the following terms: (1) call option; (2) put option; (3) exercise price; (4) striking, or strike, price; (5) option price; (6) expiration date; (7) exercise value; (8) covered option; (9) naked option; (10) in-the-money call; (11) out-of-the-money call; and (12) LEAPS. Answer: 1. A call option is an option to buy a specified number of shares of a security within some future period. 2. A put option is an option to sell a specified number of shares of a security within some future period. 3. Exercise price is another name for strike price, the price stated in the option contract at which the security can be bought (or sold). 4.
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This note was uploaded on 04/12/2011 for the course ECON 101 taught by Professor Buddin during the Spring '08 term at UCLA.

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mini-case-ch8 - Chapter 8 Financial Options and Their...

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