Download presentation

Presentation is loading. Please wait.

Published byDominik Hebdon Modified over 2 years ago

1
Option Contracts

2
Call Option Contracts Call option: right to buy an underlying asset at a pre-specified expiration time and exercise price Position –Long = purchased call option (right to buy asset) Payoff = max (0, S T – K) –Short = sold or written call option Payoff = opposite of long position = - max (0, S T – K) Type of option –American: Can exercise anytime up to or on the expiration date –European: Can exercise only on expiration date

3
Put Option Contracts Put option: right to sell an underlying asset at a pre-specified expiration time and exercise price Position –Long = purchased put option (right to sell asset) Payoff = max (0, K – S T ) –Short = sold or written put option Payoff = - max (0, K – S T ) Type: American vs European Note: –Long position in put is a short position in underlying asset, and vice versa

4
Option Premiums and Profits Premium: up-front cost of purchasing a call or a put option Payoff: option gain or loss upon exercise or expiration; ignores premium Profit: net option gain or loss, including consideration of up-front premium –Premium is brought forward to exercise / expiration date, for the time value of money, in the profit calculation. (Future value)

5
Example Amy sells Bob a 3-month European call option on one share of XYZ stock Suppose XYZ stock is trading at 32.5 Exercise price = 35 Premium = 3 At expiration (time T), suppose: S T =30S T =40 Total payoff [profit/loss] Amy:0 [ 3]-5 [-2] Bob:0 [-3] 5 [ 2]

6
Option Values Prior to expiration: Call Put –In-the-moneyS t > X S t < X –At-the-moneyS t = X S t = X –Out-of-the-moneyS t X Intrinsic value: profit that could be made if the option was immediately exercised –Call: stock price - exercise price –Put: exercise price - stock price Time value: the difference between the option price and the intrinsic value

7
Option Values: Payoff Charts Payoff K STST K K K STST STST STST Put – short position: Call – long position: Call – short position: Put – long position:

8
Payoff vs. Profit/Loss: Long Call Option STST Profit/Loss Payoff K Call Premium

9
Q: Option Contracts (From Exam FM Fin Econ Sample Questions)

10
Q: Option Profit Calculation (From Exam FM Fin Econ Sample Questions)

15
Q: Option Payoff Calculations (From Exam FM Fin Econ Sample Questions)

16
Q: Forward and Option Payoffs (From Exam FM Fin Econ Sample Questions)

Similar presentations

OK

Options Markets: Introduction Faculty of Economics & Business The University of Sydney Shino Takayama.

Options Markets: Introduction Faculty of Economics & Business The University of Sydney Shino Takayama.

© 2017 SlidePlayer.com Inc.

All rights reserved.

Ads by Google

Ppt on non biodegradable wastes Ppt on leadership qualities of bill gates Download ppt on statistics for class 11 Ppt on resources and development class 10 cbse science Ppt on different occupations pictures Ppt on abo blood grouping chart Ppt on pre ignition problems Ppt on abo blood grouping images Download ppt on the changing world of visual arts Ppt on production function and returns to a factor