FIN417, CH13 and 14

FIN417, CH13 and 14 - Call-buy Put-sell Contracted fixed...

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Call-buy Put-sell Contracted fixed from on an option= strike price or exercise price The writer has short position, the buyer has a long position Price paid for option, received by option writer- option premium European options- only exercisable a expiration date ITM,ATM,OTM- describes relationship between strike price and market price of the asset underlying the option ITM- options have positive value if they were currently exercised Generally option investors should always wait until option expiration to exercise, unless theres a huge payout on the underlying asset that they wish to access in the meantime. A call option to buy a stock at $35 is ITM if the stock price is over $35 A put with a strike price is ITM only if the mkt price of the stock underlying the put is below $35 An option is ATM if the exercise price equals the price of the underlying asset e.g. a call option to buy a stock at $35 is ATM if the stock price is $35 a put option with a strike price of $35 is ATM if its selling for $35 on the market An option is OTM if the exercise of the option now would create a negative value for the owner. e.g. a call option to buy a stock at $35 a put option to sell for $35 is OTM if the underlying stock price exceeded the strike price of $35. Some investors buy both a put option and a call option on the same stock in what is called a straddle position that effectively represents a bet on high volatility for the underlying asset than the market expects. Explain the difference between a warrant, a right, an employee stock option, and an exchange-traded option. Warrants, rights, and employee stock options are issued by the corporation, whereas exchange-traded options are created by investors trading between themselves. Employee stock options are issued to employees as part of their compensation and are not tradable (generally have fairly long times to expiration, like 10 years) Rights are issued typically to shareholders in order to permits them or anyone to whom they sell the rights to invest new equity into the company. Warrants are typically issued in conjunction with the issue of some other security (such as bonds) and generally have a long time to expiration On what date do exchange-traded options normally expire Third Friday of the contact month Assume today is February 14, 1987. Ford’s stock has a beta of 1.30. Ford pays an annual dividend of $2.60 per share. Ford’s stock price is 73.125. The annual standard deviation of Ford’s stock price is 31.18%. The yield to maturity on 10-year 0-coupon T-bonds is 6.87% Assume you are an employee of Ford and are offered an option to buy 250 shares of ford at $75 per share by February 1997. You cannot exercise the option early and you cannot sell the option A.) Whats the exact cost of this offer to ford B.) How much is this offer worth to you? Discuss the variable that would affect your answer? C.)
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This note was uploaded on 06/29/2011 for the course FIN 322 taught by Professor Zhu during the Spring '11 term at Oakland University.

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FIN417, CH13 and 14 - Call-buy Put-sell Contracted fixed...

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