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THE OHIO STATE UNIVERSITY Fisher College of Business Finance 823 Prof. Kewei Hou January 28, 2010
Sample Exam This exam is being administered under the Universitys rules for academic conduct. Open
Professor Kewei Hou
Business Finance 823
BUSINESS FINANCE 823 Winter Quarter 2010
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Instructor: Professor Kewei Hou Office: 820 Fisher Hall Phone: 292-0552 Fax: 292-2418 E-mail: [email protected] Course Web Page: http:/fisher.osu.edu/fin/faculty/hou/ Class T
Derivatives
Fin 823 823 Mon/Wed 3:30pm-5:18pm Gerlach 275 Professor Kewei Hou
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What Is a Derivative?
Definition
An agreement between two parties which has a value determined by the price of something else Options, futures and swaps Risk management Spe
Introduction to Commodity Forwards
Commodity forward prices can be described by the same formula as that for financial forward prices
F0,T = S0 e
( r )T
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Introduction to Commodity Forwards (contd)
For financial assets, i s the dividend yield For comm
IBM Option Quotes
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Put-Call Parity
For European options with the same strike price and time to expiration the parity relationship is
Call put = PV (forward price strike price) or C ( K , T ) P( K , T ) = PV0,T ( F0,T K ) = e rT ( F0,T K )
Intuition
B
Black-Scholes Formula
Consider an European call (or put) option written on a stock Assume that the stock pays dividend at the continuous rate
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Black-Scholes Formula (contd)
Call Option price
C(S, K, ,r,T,) = Se-T N(d1) Ke-rT N(d2)
Put Option price
Introduction to Corporate Applications
There are three corporate contexts in which options appear, explicitly or implicitly
Capital structure (equity, debt, and warrants) Compensation Acquisitions
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Equity, Debt and Warrants
Firms often issue securi
What Is a Derivative?
Definition
An agreement between two parties which has a
value determined by the price of something else
Types
Options, futures and swaps
Uses
Risk management
Speculation
Reduce transaction costs
Regulatory arbitrage
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Three Diff