FIN417-lecture 9 (exam 2)

FIN417-lecture 9 (exam 2) - INTERNATIONAL FINANCIAL...

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Unformatted text preview: INTERNATIONAL FINANCIAL MANAGEMENT Fifth Edition EUN / RESNICK Adapted by M.D. Griffiths Instructors Notes: Students must augment these materials for their own study purposes! Buying vs Writing Strategies Considering Only Simple Buy & Sell Strategies: In General, When You Write an Option, You are Not Expecting the Option to be Exercised. Rather, You are Hoping to Collect the Premium . In General, When You Buy an Option, You are Expecting the Option to be Exercised. More precisely, You are Hoping to Make a Profit on a Change in the Underlying Stock Prices . Buying vs Writing Options Buy a Call Pay Premium Expect Price to Rise Expect to Execute Buy a Put Pay Premium Expect Price to Fall Expect to Execute Write a Put Receive Premium Expect Price to >= Exercise Price Expect Not to Execute Write a Call Receive Premium Expect Price <= Exercise Price Expect Not to Execute Equity, Options & Options Plus T-Bills Investment Strategy Investment Equity only Buy stock @ 90 100 shares $9,000 Options only Buy calls @ 10 9 Contracts $9,000 (900 calls) Calls Plus Buy calls @ 10 1 Contract $1,000 T-Bills Buy T-bills @ 2% $8,000 Yield Equity, Options & Options Plus T-Bills IBM Stock Price $85 $100 $110 All Stock $8,500 $10,000 $11,000 All Options $0 $9,000 $18,000 Lev Equity $8,160 $9,160 $10,160 Equity, Options & Options Plus T-Bills IBM Stock Price $85 $100 $110 All Stock-5.56% 11.11% 22.22% All Options-100% 0% 100% Lev Equity -9.93% 1.78% 12.89% Rate of Return to Three Strategies Factors Affecting the Value of a Call If this variable The value of a increases Call option Stock price Increases Exercise price...
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FIN417-lecture 9 (exam 2) - INTERNATIONAL FINANCIAL...

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