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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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- Spring '08