OptionPricing

OptionPricing - Basics of Option Pricing Theory &...

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Basics of Option Pricing Theory & Applications in Business Decision Making Purpose: • Provide background on the basics of Option Pricing Theory (OPT) • Examine some recent applications What are options? Options are financial contracts whose value is • Options are financial contracts whose value is contingent upon the value of some underlying asset • Such arrangements are also known as contingent claims – because equilibrium market value of an option moves in because equilibrium market value of an option moves in direct association with the market value of its underlying asset. • OPT measures this linkage
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The basics of options Calls and puts defined • Call: privilege of buying the underlying asset at a specified price and time • Put: privilege of selling the underlying asset at a specified price and time The basics of options American and European options defined • American options can be exercised anytime before expiration date • European options can be exercised only on the expiration date • Asian options are settled based on average price of underlying asset
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The basics of options Options may be allowed to expire without • Options may be allowed to expire without exercising them • Options game has a long history – at least as old as the “premium game” of 17th century Amsterdam – developed from an even older “time game” • which evolved into modern futures markets • and spawned modern central banks Put-Call Parity C id t tf li Consider two portfolios • Portfolio A contains a call and a bond: C(S,X,t) + B(X,t) • Portfolio B contains stock plus put: S + P(S,X,t)
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This note was uploaded on 04/15/2011 for the course FINA 5220 taught by Professor Staff during the Spring '08 term at North Texas.

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OptionPricing - Basics of Option Pricing Theory &...

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