A call option is an option to purchase a specified

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Unformatted text preview: f options are calls and puts. A call option is an option to purchase a specified number of shares of a stock (typically 100) on or before a specified future date at a stated price. Call options usually have initial lives of 1 to 9 months, occasionally 1 year. The striking price is the price at which the holder of the option can buy the stock at any time prior to the option’s expiration date; it is generally set at or near the prevailing market price of the stock at the time the option is issued. For example, if a firm’s stock is currently selling for 12. Real options, opportunities embedded in capital projects that enable management to alter their cash flows and risk, were discussed in Chapter 10. The options described here differ from real options; they are a type of derivative security that derives its value from an underlying financial asset, typically common stock. Although some of the analytical tools used to value both of these types of options are similar, the focus here is merely on th...
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