Ch21 - Option Valuation Chapter 21 Option Values Intrinsic...

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Option Valuation Chapter 21
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Intrinsic value - profit that could be made if the option was immediately exercised. Call: stock price - exercise price Put: exercise price - stock price Time value - the difference between the option price and the intrinsic value. Option Values
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Option value X Stock Price Value of Call Time value Intrinsic Value Time Value of Options: Call
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Factor Effect on value Stock price increases Exercise price decreases Volatility of stock price increases Time to expiration increases Interest rate increases Dividend Rate decreases Factors Influencing Option Values: Calls
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100 200 50 Stock Price C 75 0 Call Option Value X = 125 Binomial Option Pricing: Example
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Alternative Portfolio Buy 1 share of stock at $100 Borrow $46.30 (8% Rate) Net outlay $53.70 Payoff Value of Stock 50 200 Repay loan - 50 -50 Net Payoff 0 150 53.70 150 0 Payoff Structure is exactly 2 times the Call Binomial Option Pricing: Example
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53.70 150 0 C 75 0 2C = $53.70 C = $26.85 Binomial Option Pricing: Example
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This note was uploaded on 07/12/2011 for the course FINA 221 taught by Professor Na during the Spring '09 term at HKUST.

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Ch21 - Option Valuation Chapter 21 Option Values Intrinsic...

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