20b - 8/2/2011 Chapter 20 (Part 2) 20 (Part 2) Options...

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8/2/2011 1 Chapter 20 (Part 2 Chapter 20 (Part 2) Options Markets: Introduction Thursday: Work on Chapter 20 problems Friday: Chapter 21 (Part 1) – Option Valuation (Binomial & Black-Sholes) 0T | | S 0 S T = ? t Yesterday A call option gives its holder the right to purchase an asset (stock) for a specified price (exercise price, X) on or before some specified expiration date (T). put option gives its holder the right to sell an asset for a specified price (exercise price, X) on or before some specified expiration date (T). P Cl lP i t Th Put-Call Parity Theorem: More general condition:  0 20 1 1 T f X CS P . r  0 20 2 P C S PV X PV(dividends) .  
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8/2/2011 2 Yesterday Protective Put Stock + Put Why?
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8/2/2011 3 Protective Put Example Portfolio Value (Payoff) Stock + Put S 0 = $30 P 0 (X=30) = $5 0 10 20 30 40 50 60 -30 -20 -10 0 1 02 03 04 05 06 0 40 50 60 20 30 40 50 60 -30 -20 -10 0 10 20 30 0 -30 -20 -10 0 10 0 Protective Put Example Portfolio Value (Payoff) Stock + Put S 0 = $30 P 0 (X = 30) = $5 Profit: ( S T –S 0 ) + ( P T –P 0 ) S T < X : P T = X – S T Profit : X – ( S 0 + P 0 ) = 30 – (30 + 5) = – 5 S T > X : P T = 0 Profit : ( S T 0 ) 0 = ( S T –30 ) – 5 = S T –35 20 30 40 50 60 20 30 40 50 60 Stock Profit -30 -20 -10 0 10 0 -30 -20 -10 0 10 0 P. P. Profit
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8/2/2011 4 Covered Call Stock – Call Why? Covered Call Example Portfolio Value (Payoff) Stock – Call S 0 = $30 C 0 (X=30) = $5 0 10 20 30 40 50 60 -30 -20 -10 0 1 02 03 04 05 06 0 40 50 60 20 30 40 50 60 -30 -20 -10 0 10 20 30 0 -30 -20 -10 0 10 0
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8/2/2011 5 Covered Call Example Portfolio Value (Payoff) Stock Call S 0 = $30 C 0 (X = 30) = $5 Profit: ( S T –S 0 ) + ( C 0 –C T ) S T < X : C T = 0 Profit : ( S T 0 ) + C 0 = ( S T –30 ) + 5 = S T –25 S T > X : T = – ( S T
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This note was uploaded on 02/02/2012 for the course ECON 442 taught by Professor Grahamlemke during the Spring '11 term at Binghamton University.

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20b - 8/2/2011 Chapter 20 (Part 2) 20 (Part 2) Options...

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