week 11 - Week 11 Tutorial Emily Lo Option Fundamentals...

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Week 11 Tutorial Emily Lo
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Option Fundamentals Financial instrument which derives its value from an underlying asset Exchange traded options : - terms and conditions of the option contracts are standardised by the exchange Over-the-counter options : - tailor-made option contracts to suit the requirements of the initiating party American options: - can be exercised before the maturity date of the option European options: - can be exercised only at the maturity Call options: - the right to buy the underlying asset at the exercise price Put options: - the right to sell the underlying asset at the exercise price Option class : call or put for the same underlying asset Option series : all the options of a given class with the same expiration date strike price
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Option positions Long call Long put Short call Short put Payoff: Max{0, S-X} Payoff: - Max{0, S-X} Payoff: Max{0, X-S} Payoff: - Max{0, X-S}
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Elements of an option Premium - price of the option - determined by its intrinsic value and time value Intrinsic value - exercise value of the option - in-the-money when intrinsic value > 0 - at-the-money when intrinsic value = 0 - out-the-money when intrinsic value < 0 Time Value - Determined by time to expiration and volatility If the option is out-of-the money before expiration, is it worthless?
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This note was uploaded on 01/10/2012 for the course FINS 3616 taught by Professor Curry during the Three '10 term at University of New South Wales.

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week 11 - Week 11 Tutorial Emily Lo Option Fundamentals...

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