1. Mark Grinblatt Sheridan Titman Financial Markets and Corporate Strategy, 2/e McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 8-1

2. Mark Grinblatt Sheridan Titman Financial Markets and Corporate Strategy, 2/e McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 8-2 Part II Valuing Financial Assets

3. Mark Grinblatt Sheridan Titman Financial Markets and Corporate Strategy, 2/e McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 8-3 Chapter 8 Options

4. Mark Grinblatt Sheridan Titman Financial Markets and Corporate Strategy, 2/e McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 8-4 Exhibit 8.1: The Value of a Call Option and a Put Option at Expiration

5. Mark Grinblatt Sheridan Titman Financial Markets and Corporate Strategy, 2/e McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 8-5 Exhibit 8.2: The Value of Short Positions in Call and Put Options at Expiration

6. Mark Grinblatt Sheridan Titman Financial Markets and Corporate Strategy, 2/e McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 8-6 Exhibit 8.3: The Value at Expiration of a Long Position in a Call Option and a Short Position in a Put Option with the Same Features

7. Mark Grinblatt Sheridan Titman Financial Markets and Corporate Strategy, 2/e McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 8-7 Exhibit 8.4a: Comparing Two Investments (Algebra)

8. Mark Grinblatt Sheridan Titman Financial Markets and Corporate Strategy, 2/e McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 8-8 Exhibit 8.4b: Comparing Two Investments (Numbers) with K = $50

9. Mark Grinblatt Sheridan Titman Financial Markets and Corporate Strategy, 2/e McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 8-9 Exhibit 8.5: Horizon Date Values of the Two Components of an Insured Portfolio

10. Mark Grinblatt Sheridan Titman Financial Markets and Corporate Strategy, 2/e McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 8-10 Exhibit 8.6: Tree Diagram for the Value of the Stock (Above Node) and the Call Option (Below Node) Near the Expiration Date

11. Mark Grinblatt Sheridan Titman Financial Markets and Corporate Strategy, 2/e McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 8-11 Exhibit 8.7: Binomial Tree Diagram for the Value of Centocor Stock (Above Node) and the Centocor Call Option (Below Node)

12. Mark Grinblatt Sheridan Titman Financial Markets and Corporate Strategy, 2/e McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 8-12 Exhibit 8.8: Binomial Tree Diagram for the Price of Chiron Stock (Above Node) and an American Put Option (Below Node) with K = $27.50 and T=2

13. Mark Grinblatt Sheridan Titman Financial Markets and Corporate Strategy, 2/e McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 8-13 Exhibit 8.9: Computation of the Volatility Estimate for the Black-Scholes Model Using Historical Return Data on Dell Computer 1990-1 1990-2 1990-3 1990-4 1991-1 1991-2 1991-3 1991-4 1992-1 1992-2 1992-3 1992-4 1993-1 1993-2 1993-3 1993-4 1994-1 1994-2 1994-3 1994-4 1995-1 1995-2 1995-3 1995-4 1996-1 1996-2 1996-3 1996-4 1997-1 1997-2 1997-3 1997-4 1998-1 1998-2 1998-3 1998-4 1999-1 1999-2 1999-3 1999-4 Logged gross return standard deviation Annualized standard deviation, the volatility estimate Year-QuarterReturn %Gross Return %Logged Gross Return 38.57 65.62 -30.72 111.53 54.07 -14.05 36.25 -23.24 41.96 -25.26 57.94 67.67 -26.83 -46.61 -11.33 36.07 11.60 4.46 41.96 9.50 6.71 37.43 41.36 -18.53 -3.24 51.86 52.83 36.65 27.30 73.66 64.98 -13.29 61.31 36.99 41.68 11.31 11.70 -9.48 13.01 21.97 138.57 165.62 69.28 211.53 154.07 85.95 136.25 76.76 141.96 74.74 157.94 167.67 73.17 53.39 88.67 136.07 111.60 104.46 141.96 109.50 106.71 137.43 141.36 81.47 96.76 151.86 152.83 136.65 127.30 173.66 164.98 86.71 161.31 136.99 141.68 111.31 111.70 90.52 113.01 121.97 0.303808 0.607617 0.3262 0.5045 -0.3670 0.7492 0.4323 -0.1513 0.3093 -0.2645 0.3504 -0.2911 0.4571 0.5168 -0.3123 -0.6276 -0.1203 0.3080 0.1097 0.0436 0.3503 0.0908 0.0650 0.3180 0.3462 -0.2049 -0.0330 0.4178 0.4242 0.3123 0.2413 0.5519 0.5007 -0.1426 0.4782 0.3148 0.3484 0.1072 0.1106 -0.0996 0.1223 0.1986

14. Mark Grinblatt Sheridan Titman Financial Markets and Corporate Strategy, 2/e McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 8-14 Exhibit 8.10: The Value of a Call Option as a Function of its Volatility

15. Mark Grinblatt Sheridan Titman Financial Markets and Corporate Strategy, 2/e McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 8-15 Exhibit 8.11: Effect of Increasing Volatility

16. Mark Grinblatt Sheridan Titman Financial Markets and Corporate Strategy, 2/e McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 8-16 Exhibit 8.12: Determinants of Current Option and Forward Prices: Effect of a Parameter Increase

17. Mark Grinblatt Sheridan Titman Financial Markets and Corporate Strategy, 2/e McGraw-Hill/Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 8-17 Exhibit 8.13: Implied Volatility versus Strike Price