Chapter 16 (exam 3)

Chapter 16 (exam 3) - Chapter 16 Option Valuation Option...

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Chapter 16 Option Valuation
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Option Values Intrinstic 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
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Determinants of Call Option Values Stock price Exercise price Volatility of the stock price Time to expiration Interest rate Dividend rate of the stock
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Black-Scholes Model Recognized that it is possible to create a riskless hedge portfolio involving a long position in a stock and a short position in a specific number of call options written on the stock
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Black-Scholes Model Based on simplifying assumptions » No transactions costs or taxes » No dividends on stock » No riskless arbitrage opportunities » Security trading is continuous » Investors borrow and lend at the risk-free rate » Short-term risk free rate is constant
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Black-Scholes Model Five variables needed to value a European call
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Chapter 16 (exam 3) - Chapter 16 Option Valuation Option...

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