lecture6-819

lecture6-819 - Introduction to options Some basic concepts...

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FIN 819: lecture 6 Introduction to options Some basic concepts
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FIN 819: lecture 7 Today’s plan Review what we have learned so far Introduction of options Definition of options Position diagrams No arbitrage argument Put-call parity Application of put-call parity How does stock return volatility affect option values?
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FIN 819: lecture 7 What have we learned so far? So far we have discussed or reviewed some fundamental concepts and ideas about valuation Present value concept Discounted cash flow approach and the NPV rule Free-cash flow calculation Cost of capital (WACC) CAPM Levered and unlevered betas Two cases related to these concepts
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FIN 819: lecture 7 Introduction to options What is an option in Finance? An option is a right or opportunity to do something at a specified price or cost on or before some specified date. An option, is a contract Options are everywhere. IBM offers its CEO a bonus that is related to the stock price (stock options) IBM postpones investment in a positive-NPV project, even if IBM has capital for taking this investment.
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FIN 819: lecture 7 Options Financial options Real options It depends on what is the underlying asset the option is written in
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FIN 819: lecture 7 Options in financial assets What is an option written in financial assets? A financial option is a right to sell or buy some financial asset at a specified price or cost on or before some specified date. (ex: option written on IBM or Dell) A financial option can be regarded as a contract between sellers and buyers The financial asset specified in the financial option contract is often called the underlying financial asset.
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FIN 819: lecture 7 Real Options Real options Options that are written on real assets are called real options For example, the option to set up a factory is called a real option In the next two lectures, we focus on financial options, since it is easier to price them.
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Now we focus on (financial) options… Suppose the financial asset is common stock There are two basic types of options, Call option the right to buy a share of stock at a specified price before or on some date. Put
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This note was uploaded on 10/05/2011 for the course FIN 819 taught by Professor Staff during the Spring '11 term at S.F. State.

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lecture6-819 - Introduction to options Some basic concepts...

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