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Options and Corporate Finance > Options
Options
• Defining Options and Their Valuation
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Options and Corporate Finance > Options
Defining Options and Their Valuation
• An option that conveys the right to buy something at a specific price is called a
call; an option that conveys the right to sell something at a specific price is called
a put.
• Today, many options are created in a standardized form and traded through
clearinghouses on regulated options exchanges, while other over-the-counter
options are written as bilateral, customized contracts between a single buyer and
seller.
• The most common options are European, which may only be exercised on
expiration, and American, may be exercised on any trading day on or before
expiration.
European Call Surface
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• Nearly all stock and equity options are American options, while indexes are
generally represented by European options.
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Appendix
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Options and Corporate Finance
Key terms
• in the money For a call option, when the option's strike price is below the market price of the underlying asset. For a put option,
when the strike price is above the market price of the underlying asset.
• out of the money A call option with a strike price that is higher than the market price of the underlying asset, or a put option with
a strike price that is lower than the market price of the underlying asset.
• stochastic Random, randomly determined, relating to stochastics.
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Options and Corporate Finance
Valuation of a Call Option
Where: N is the cumulative distribution function of the standard normal distribution; T - t is the time to maturity; S is the spot price of the underlying asset;
K is the strike price; r is the risk free rate; and omega is the volatility of returns of the underlying asset.
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Wikipedia. "Black–Scholes." GNU FDL http://en.wikipedia.org/wiki/Black%25E2%2580%2593Scholes View on Boundless.com
Options and Corporate Finance
European Call Surface
A European call valued using the Black-Scholes pricing equation for varying asset price S and time-to-expiry T. In this particular example, the strike price
is set to unity, the risk-free rate is 0.04 and the volatility is 0.2.
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Wikipedia. "European Call Surface." GNU FDL http://en.wikipedia.org/wiki/File:European_Call_Surface.png View on Boundless.com
Options and Corporate Finance
Value of a Put Option
Where: N is the cumulative distribution function of the standard normal distribution; T - t is the time to maturity; S is the spot price of the underlying asset;
K is the strike price; r is the risk free rate; and omega is the volatility of returns of the underlying asset.
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Wikipedia. "Black–Scholes." GNU FDL http://en.wikipedia.org/wiki/Black%25E2%2580%2593Scholes View on Boundless.com
Options and Corporate Finance
A company issues an option that can only be exercised prior to
expiration on three specific days that are defined in the contract.
What type of option is this?
A) A European option.
B) A Bermudan option.
C) An American option.
D) An Asian option.
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Options and Corporate Finance
A company issues an option that can only be exercised prior to
expiration on three specific days that are defined in the contract.
What type of option is this?
A) A European option.
B) A Bermudan option.
C) An American option.
D) An Asian option.
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Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Options and Corporate Finance
Which of the following factors influences the value of an option?
A) All of these answers.
B) The strike price of the option.
C) The cost of holding a position in the underlying security, including
interest and dividends.
D) The time until expiration.
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Options and Corporate Finance
Which of the following factors influences the value of an option?
A) All of these answers.
B) The strike price of the option.
C) The cost of holding a position in the underlying security, including
interest and dividends.
D) The time until expiration.
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Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/
Options and Corporate Finance
Attribution
• Wikipedia. "Black–Scholes." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Black%25E2%2580%2593Scholes
• Wikipedia. "Derivative (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Derivative_(finance)
• Wikipedia. "Option (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Option_(finance)
• Wiktionary. "stochastic." CC BY-SA 3.0 http://en.wiktionary.org/wiki/stochastic
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/out-of-the-money
• Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/in-the-money
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