Tutorial 9

Tutorial 9 - 1 3. Option styles: (1) European-style:...

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07/08 Semester II THE UNIVERSITY OF HONG KONG DEPARTMENT OF STATISTICS AND ACTUARIAL SCIENCE STAT1802 Financial Mathematics Tutorial 9 1 Review 1.1 Basic Concepts 1. Forward and Futures Contract OBLIGATION to buy or sell underlying asset at a certain date in the future. Uses: Hedging and Speculation 2. Options Contract RIGHT to buy or sell underlying asset at a certain date in the future. 1. Call Option: RIGHT to buy (1) Purchasing Call Option: Payoff = Max[0, spot price at expiration - strike price ] Profit = Payoff - future value of option premium (2) Written Call Option: Payoff = - Max[0, spot price at expiration - strike price ] Profit = Payoff + future value of option premium 2. Put Option: RIGHT to sell (1) Purchasing Put Option: Payoff = Max[0, strike price - spot price at expiration ] Profit = Payoff - future value of option premium (2) Written Put Option: Payoff = - Max[0, strike price - spot price at expiration ] Profit = Payoff + future value of option premium
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Unformatted text preview: 1 3. Option styles: (1) European-style: exercised only at expiration date (2) American-style: exercised at any time before expiration (3) Bermudan-style: exercised during specified periods 3. Moneyness Call Option Put Option Intrinsic Value max [ S t-E, 0] max [ E-S t , 0] In-the-money S t > E S t < E At-the-money S t = E S t = E Out-of-the-money S t < E S t > E 1.2 Properties of options 1. Gain & Loss 1. Call Option (1) Long position: limited loss but unlimited gain (2) Short position: limited gain but unlimited loss if you do not own the underlying security 2. Put Option (1) Long position: limited loss and limited gain (2) Short position: limited gain and your loss is limited to the exercise price of the asset in the contract 2. Factors affecting the values of options Call Option Put Option Stock price +-Exercise price-+ Interest rate +-Volatility in the stock price + + Expiration date + + 2...
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Tutorial 9 - 1 3. Option styles: (1) European-style:...

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