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course material-Derivative Securities and Risk Managemen

European options which have nothing to do with europe

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European options , which have nothing to do with Europe, can be exercised only on the expiration date.
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24 Types of Options Two popular types of options are stock options and index options. Options on individual stocks are sometimes called stock options or equity options . A stock index [NASDAQ 100] is a measure of the overall value of a designated group of stocks . It is a relative measures. Index option represent the market value of the stocks [NASDAQ 100] relative to a base level base level value, typically created many years ago when the index was initiated.
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25 Currency Options A foreign exchange rate foreign exchange rate is the price a party can exchange one currency for another currency. Because many firms and investors have exposure to exchange rate risk , options and other currency derivatives are widely used. A currency option contract specifies an exercise price , expressed in terms of an exchange rate, an expiration , the identity of the underlying currency , the size of the contract , and various other specifications similar to those of stock and index options. The more active market is the OTC currency options market (market value of $315 trillion in 2007)
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26 Other Types of Options Options on bonds Interest rate options Innovative options include some that pay off based on how the price of a commodity, such as oil, performs Options that pay off based on which stock index, say the S&P 500, performs ……..
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27 Transaction Costs in Option Trading Floor trading and clearing fees trading and clearing fees are the minimum charges assessed by the exchange, the clearing corporation, and the clearing firms for handling a transaction. Commissions Commissions on each trade The market maker’s spread spread is a significant transaction cost Other transaction costs include margins margins and taxes taxes
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Class Discussion (1) What are the three ways in which derivatives can be misused.
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Class Discussion (2) Suppose you are shopping for a new automobile. You find the same car at two dealers but at different prices. Is the law of one price being violated? Why and why not?
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Class Discussion (3) Identify three presuppositions for well- functioning financial markets.
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Class Discussion (4) Assume that you are faced with an opportunity made up of three equally likely outcomes. If the first outcome occurs, you receive $10 . If the second outcome occurs, you receive no money . If the third outcome occurs, you must pay out $1 . Given that you can be characterized as risk neural , how much would you pay to take this risk? Would you be willing to pay more or less for this opportunity? Explain.
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32 Any Questions?
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