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topic05_pres - EC372 Bond and Derivatives Markets Options...

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Unformatted text preview: EC372 Bond and Derivatives Markets Options Markets I: fundamentals R. E. Bailey Department of Economics University of Essex University week 20 EC372 Bond and Derivatives Markets Options Markets I Topic #5 Outline 1 Call options and put options 2 Payoffs on options 3 Option-like assets 4 Upper and lower bounds for option prices Lower bounds for European option premiums 5 The put-call parity relationship Reading: Economics of Financial Markets , chapter 18 EC372 Bond and Derivatives Markets Options Markets I Topic #5 Outline Call options and put options Call options and put options I Options provide a right but not an obligation to take an action I Call option: the right but not the obligation to buy, on or before the expiry date, an underlying asset for the exercise price I Put option: the right but not the obligation to sell, on or before the expiry date, an underlying asset for the exercise price I Holders (buyers) and Writers (issuers) I Holder owns the option: has long position (an asset) I Writer has issued the option: has a short position (a liability) I Two styles: I American style: exercise at any time prior to expiry date I European style: exercise at expiry date only I Options can die, unexercised options are exercised only if it is profitable to do so EC372 Bond and Derivatives Markets Options Markets I Topic #5 Outline Call options and put options Call options and put options I Options provide a right but not an obligation to take an action I Call option: the right but not the obligation to buy , on or before the expiry date, an underlying asset for the exercise price I Put option: the right but not the obligation to sell, on or before the expiry date, an underlying asset for the exercise price I Holders (buyers) and Writers (issuers) I Holder owns the option: has long position (an asset) I Writer has issued the option: has a short position (a liability) I Two styles: I American style: exercise at any time prior to expiry date I European style: exercise at expiry date only I Options can die, unexercised options are exercised only if it is profitable to do so EC372 Bond and Derivatives Markets Options Markets I Topic #5 Outline Call options and put options Call options and put options I Options provide a right but not an obligation to take an action I Call option: the right but not the obligation to buy, on or before the expiry date, an underlying asset for the exercise price I Put option: the right but not the obligation to sell , on or before the expiry date, an underlying asset for the exercise price I Holders (buyers) and Writers (issuers) I Holder owns the option: has long position (an asset) I Writer has issued the option: has a short position (a liability) I Two styles: I American style: exercise at any time prior to expiry date I European style: exercise at expiry date only I Options can die, unexercised options are exercised only if it is profitable to do so EC372 Bond and Derivatives Markets Options Markets I Topic #5 Outline...
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topic05_pres - EC372 Bond and Derivatives Markets Options...

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