CHAPTER 9
Mechanics of Options Markets
Practice Questions
Problem 9.8.
A corporate treasurer is designing a hedging program involving foreign currency options.
What are the pros and cons of using (a) the NASDAQ OMX and (b) the over-the-counter
market for

Futures & Options Markets
(Assignment 1)
Due: March 23 (Wed) 9 am
Problem 1
The spot price of the market index is $900. A 3-month forward contract on this index is priced at $930.
Draw the profit profile for the short position in the forward contract.
(Hi

Mechanics of
Options Markets
Prof. Baeho Kim
Types of Options
Call / Put Options
A call is an option to buy
A put is an option to sell
European / American Options
A European option can be exercised only at the
end of its life
An American option can

Hedging Option Positions &
Synthetic Options
Prof. Baeho Kim
Hedging Options and Synthetic Options
Objectives
To understand how the option positions can be
hedged away
We consider the changes in the value of the option
positions as a function of value o

Black-Scholes-Merton
Option Pricing Model
Prof. Baeho Kim
Black-Scholes-Merton Option Pricing Model
Objectives
To understand how the options are priced using
Black-Scholes-Merton Option Pricing Model
(BSMOPM)
We introduce the theoretical model, and empi

Mechanics of Forward and
Futures Markets
Prof. Baeho Kim
Forward and Futures Markets
Objectives
To understand how the futures and forward
markets work
In particular, with regard to the futures markets, we
examine issues such as how the contracts are
spe

Binomial Option Pricing Model
Prof. Baeho Kim
Binomial Option Pricing Model
Objectives
To understand how the options are priced using
Binomial Option Pricing Model (BOPM)
We start with a simple one-step model, and
expand the analysis into a general mult

Futures & Options Markets
(Assignment 2)
Due: April 13 (Wed) 9am
Problem 1
(a) With the notations in the lecture notes, prove the following relationship:
S o K C P S 0 Ke rT ,
where C and P are the prices of American call and put options, respectively.
(H

Trading Strategies
Involving Options
Prof. Baeho Kim
Three Types of Trading Strategies
1. A position in an option and the underlying
security.
2. Spread
A position in the same type of options (either
calls or puts) on the same underlying security.
3. Comb

Futures & Options Markets
(Assignment 1 - Solutions)
Problem 1
The spot price of the market index is $900. A 3-month forward contract on this index is priced at
$930. Draw the payoff diagram for the short position in the forward contract.
(Hint: Ignore th

Futures & Options Markets
(Assignment 2 - Solutions)
Problem 1
(a) With the notations in the lecture notes, prove the following relationship:
S o K C P S 0 Ke rT ,
where C and P are the prices of American call and put options, respectively.
(Hint: For the

Basic Properties of
Stock Options
Prof. Baeho Kim
Option Quotes
IBM option prices, dollars per share, October 16, 2007.
The closing price of IBM on that day was $119.60.
Notation
c : European call option price
C : American Call option price
p : European

Options on Stock Indices and Currencies
Objectives
To understand how the options on indices and
currencies should be priced
We argue that these options are similar to options
on stocks that pay continuous dividend yield
Therefore, we can use the pricin

Binomial Option Pricing Model
Prof. Baeho Kim
Binomial Option Pricing Model
Objectives
To understand how the options are priced using
Binomial Option Pricing Model (BOPM)
We start with a simple one-step model, and
expand the analysis into a general mult

Appendix: Derivation of Risk-neutral Valuation
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