FINS 2624 Study Notes Compressed

# The serial correlation measures the correlation

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Unformatted text preview: ion of S* The potential loss is limited to the option premium 12 Cheryl Mew FINS2624 – Portfolio Management Semester 1, 2011 S HORT A CALL Initial Payoff = -C0 Final Payoff = - Max {S* – X, 0} Profit and Loss = C0 - Max {S* – X, 0} Summary for a short call: Payoff moves in the opposite direction to the final stock price if the option finishes in the money, and becomes zero if the option finishes at or out of the money Investors adopt the position in anticipation of falling prices as the position results in a profit at any final stock price below the breakeven point The short call has limited profit, as maximum profit occurs when it is at or out of money – the premium. The downside risk is unlimited and gets worse as S* increases in value. L ONG A PUT Initial Payoff = P0 Final Payoff = Max {X – S*, 0} Profit and Loss = Max {X – S*, 0} - P0 Summary for a long put: Payoff moves in the opposite direction to the final stock price if the option finishes in the money, and becomes zero if the option finishes at or out of the money Investors adopt the position in anticipation of falling prices as the position results in a profit at any final stock price below the breakeven point The short call has limited profit, as maximum profit occurs when S* = 0 The maximum loss is limited to the premium of the option S HORT A PUT Initial Payoff = -P0 Final Payoff = -Max {X – S*, 0} Profit and Loss = P0 - Max {X – S*, 0} Summary for a short put: Payoff moves in the same direction to the final stock price if the option finishes in the money, and becomes 0 if the option finishes at or out of the money Investors adopt the position in anticipation of rising prices as the position results in a profit at any final stock price above the breakeven point The short put has limited profit, as maximum profit occurs when it is at or out of money – the premium. The maximum loss occurs when S* drops to 0. 13 Cheryl Mew FINS2624 – Portfolio Management Semester 1, 2011 S UMMARY OF 6 BASIC NAKED POSITIONS Value or Payoff is the aggregate value or payoff of the constituent assets Profit and Loss is the difference between the final and initial payoff of the posit...
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## This document was uploaded on 03/21/2014.

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