Search for notes by fellow students, in your own course and all over the country.
Browse our notes for titles which look like what you need, you can preview any of the notes via a sample of the contents. After you're happy these are the notes you're after simply pop them into your shopping cart.
Title: options
Description: Option Contracts Option terminology and basics Call option Long position: right to buy the underlying stock at a specific price on a future date Short position: obligation to sell the stock to the buyer of the call option Put option Long position: right to sell the underlying stock at a specific price on a future date Short position: obligation to buy the stock from the buyer of the put option
Description: Option Contracts Option terminology and basics Call option Long position: right to buy the underlying stock at a specific price on a future date Short position: obligation to sell the stock to the buyer of the call option Put option Long position: right to sell the underlying stock at a specific price on a future date Short position: obligation to buy the stock from the buyer of the put option
Document Preview
Extracts from the notes are below, to see the PDF you'll receive please use the links above
Option Contracts
Option terminology and basics
Call option
Long position: right to buy the underlying stock at a specific
price on a future date
Short position: obligation to sell the stock to the buyer of
the call option
Put option
Long position: right to sell the underlying stock at a specific
price on a future date
Short position: obligation to buy the stock from the buyer
of the put option
Option Contracts
Option terminology and basics
The strike price (X): represents the exercise price
specified in the contract
The seller or short position in an options contract
is sometimes referred to as the writer of the option
American Option allow the owner to exercise the
option at any time before or at expiration
European option can only be exercised at
expiration
...
Commodity options are on physical underlying assets
such as gold, maize, oil, wheat etc
Index options payoffs are based on the difference
between the strike price and the index, times a specified
multiplier
...
It is the amount that the option owner would
receive if the option were exercised
...
Valuation of Options
Valuation of Options
Option’s time value
It is the amount by which the option premium
exceeds the intrinsic value and is sometimes called
the speculative value of the option
...
In order to construct a binomial model, we need
to know the beginning asset value, size of the two
possible changes, and the probabilities of each of
these changes occurring
Valuation of Options
Valuation of Options
Valuation of Options
Binomial model
We can calculate the value of an option on the
stock by:
Calculating the payoff of the option at maturity in
both the up-move and down-move states
Calculating the expected value of the option in
one year as the probability-weighted average of the
payoffs in each state
Discounting the expected value back to today at
the risk-free rate
Valuation of Options
D= size of a down-move = 1/U = 1/1
...
75
Risk neutral probability of an up-move = (1+0
...
75)/(1
...
75) = 0
...
55 = 0
...
25 = 0
...
07-0
...
25-0
...
6
Risk neutral probability of a down-move = 1-0
...
4
Valuation of Options
Valuation of Options
Valuation of Options
Valuation of Option Contracts
Valuation of Options
Valuation of Options
Black Scholes-Merton (BSM) model
It values options in continuous time and is
derived from the same no-arbitrage assumption
used to value options with the binomial model
...
and a European
call option on that stock
...
The stock's volatility is 0
...
The annual
continuously-compounded risk-free interest rate is
0
...
04
...
Find the call price using the
Black-Scholes formula
...
5σ2)T]/[σ√(T)] =
• [ln(600/654) + (0
...
04 + 0
...
42)2]/[0
...
4133433415
• Now we find d2 = d1 - σ√(T) = 0
...
4√(2) = d2 = 0
...
4133433415)", we find
that N(d1) = 0
...
1523420835)", we find
that N(d2) = 0
...
04*20
...
12*20
...
6511706
Title: options
Description: Option Contracts Option terminology and basics Call option Long position: right to buy the underlying stock at a specific price on a future date Short position: obligation to sell the stock to the buyer of the call option Put option Long position: right to sell the underlying stock at a specific price on a future date Short position: obligation to buy the stock from the buyer of the put option
Description: Option Contracts Option terminology and basics Call option Long position: right to buy the underlying stock at a specific price on a future date Short position: obligation to sell the stock to the buyer of the call option Put option Long position: right to sell the underlying stock at a specific price on a future date Short position: obligation to buy the stock from the buyer of the put option