EC3333 Notes10 - Notes No. 10 Notes No. 10 ption Valuation...

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Unformatted text preview: Notes No. 10 Notes No. 10 ption Valuation Option Valuation Option Values Option Values  Intrinsic value - profit that could be made if the ption is immediately exercised (in- e- oney option is immediately exercised (in the money option) ◦ all: stock price at time 0- xercise price Call: stock price at time 0 exercise price ◦ Put: exercise price - stock price at time 0 djusted Intrinsic Value of a call:  Adjusted Intrinsic Value of a call: ◦ Call: stock price at time 0 – PV(exercise price)  Time value - the difference between the option price and the intrinsic value Call Option Value before Call Option Value before Expiration Expiration Determinants Determinants of Call of Call Option Option Values Values Restrictions on Option Value: Call Restrictions on Option Value: Call  Value cannot be negative: nonnegative future revenue  Value cannot exceed the stock value: When =0, same revenue with stock X 0, same revenue with stock  Value of the call must be greater than the lue of levered equity suppose the stock pays value of levered equity, suppose the stock pays a dividend of D just before expiration, then C > S- ( X + D ) / ( 1 + r f ) T =S- PV ( X ) - PV ( D ) Reason: Call vs a leveraged equity ( the share and rrowing of ( X + D ) / ( 1 + borrowing of ( X + D ) / ( 1 + r f ) T ) Revenue from the leveraged equity is S T-X Range Range of Possible Call Option Values of Possible Call Option Values Call Call Option Value as a Function of the Current Option Value as a Function of the Current ock Price ock Price Stock Price Stock Price Put Put Option Values as a Function of the Current Option Values as a Function of the Current ock Price ock Price Stock Price Stock Price...
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This note was uploaded on 10/30/2011 for the course ECON EC3333 taught by Professor Lu during the Spring '11 term at National University of Singapore.

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EC3333 Notes10 - Notes No. 10 Notes No. 10 ption Valuation...

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