Lect 18 221 web - Managerial Finance Lecture 18 Options...

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1 Managerial Finance Lecture 18 Options Pricing, Executive Compensation and Option Sensitivities Class 17. Summary The prices of European call and put options are related by put-call parity American calls & puts always have non-negative “ time value American calls & puts always have non-negative American calls should not be exercised early unless they pay dividends American puts may be exercised early when interest on strike is high Binomial model: calls, puts and all other derivative securities can be priced by no-arbitrage arguments Steps: 1. Find the cash-flows of the options 2. Find existing assets ( shares and B bonds) that yield the same cash-flows 3. Find the price of those existing assetsand you are done ! Call option : is always between 0 and 1 and T-Bill is between 0 and -K Put option : is always between 0 and -1 and T-Bill is between 0 and K 2
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