Observer Design Pattern
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CS 631: Behavioral Design Patterns: Observer
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Outline
• Application
• Options
– Call options
– Put options
• Option Positions
• Option Evaluation
• Option Price ticker
– C++ classes
• Observer Pattern
– Design
– Analysis
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Options: Definitions
• A call option gives the holder the right to buy the
underlying asset by a certain date for a certain price.
• A put option gives the holder the right to sell the
underlying asset by a certain date for a certain price.
• The price in the contract is known as the strike
price.
• The date in the contact is known as expiration date
or maturity.
• American options can be exercised any time up to
the expiration date.
• European options can be exercised only on the
expiration date itself.
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Call Option
• Example:
– An investor buys a European call option with a strike
price of $60 to purchase 100 Microsoft shares.
– The current stock price is $58.
– The expiration date in in 4 months.
– The price of an option to purchase one share is $5.
• The initial investment is $5 x 100 = $500
• Exercise:
– In four months the stock price = $75
• The investor buys 100 shares at $60 and immediately sells them
for $75 making a gain of 100 ($75-$60) = $1,500.
• The net profit is $1,500 - $500 = $1000
– In four months the stock price <= $60
• The net loss is the initial investment of $500.
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CS 631: Behavioral Design Patterns: Observer
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Profit ($)
Call Option: Profit Chart
25
20
15
10
5
0
-5
-10
0 30 40 50 60 65 75 85
Terminal stock price ($)
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Put Option
• Example:
– An investor buys a European put option with a strike price
of $60 to purchase 100 Microsoft shares.
– The current stock price is $58.
– The expiration date in in 4 months.
– The price of an option to purchase one share is $5.
• The initial investment is $5 x 100 = $500
• Exercise:
– In four months the stock price = $50
• The investor buys 100 shares at $50 and sells them under the
contract for $60 making a gain of 100 ($60-$50) = $1,000.
• The net profit is $1,000 - $500 = $500
– In four months the stock price >= $60
• The net loss is the initial investment of $500.
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Put Option: Profit Chart
Profit ($)
60
40
20
0
-20
0
55
60
100
150
Terminal stock price ($)
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Option Positions
• There two sides to every option contract:
– An investor who has taken a long position, i.e. bought the
option.
– An investor who has taken a short position, i.e. has sold or
written the option.
– The writer's profit or loss is the reverse of that for the
purchaser of the option.
• There are four types of option positions:
–
–
–
–
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A long position in a call option.
A long position in a put option.
A short position in a call option.
A short position in a put option.
CS 631: Behavioral Design Patterns: Observer
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Option Positions: Payoff
• Assume K is the strike price and ST is the final price
of the underlying asset.
• European option positions can be characterized in
terms of the payoff to the investor at maturity.
– The payoff from a long position in a European call option
is max(ST - K,0)
• Reflects the fact that the option will be exercised if ST > K and
will not be exercised if ST  K.
– The payoff to the holder of a short position in the call
option is -max(ST - K,0) = min(K - ST,0)
– The payoff to the holder of a long position in a put option
is max(K - ST,0)
– The payoff to the holder of a short position in a put option
is -max(K - ST,0) = min(ST - K,0)
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Options: Evaluation
Let r be the current risk-free interest rate, and p be the option's price.
Then the value of a long position in the European call option can be
calculated as:
f  max( ST  K ,0)(1  r ) T  p
Then the value of a short position in the European call option can be
calculated as:
f  p  min( K  ST )(1  r ) T
In other words, the values of long and short positions are:
f l  PT (1  r ) T  p
f s  p  PT (1  r ) T
where PT is a payoff at the time of maturity T.
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Application: Option Price Ticker
• Consider an application that updates values (prices)
of different option positions on the same asset, say
Microsoft stock. The updates will be displayed
during the day when an event happens:
–
–
–
–
Change in the interest rate.
Change in the option price.
Change in the strike price.
Change in the current asset's price.
• The application will be based on the following
classes:
– MarketWatch: watches the market and updates the values
of observed options.
– OptionPosition: calculates the value of an option position.
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MarketWatch Class
class MarketWatch
{
public:
MarketWatch();
void attach(OptionPosition& pos);
vector<double> getValues();
double update();
double
double
double
double
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getRate();
getAssetPrice();
getOptionPrice();
getStrikePrice();
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MarketWatch Class (cont.)
protected:
vector<OptionPosition> positions;
string asset;
double
double
double
double
rate;
assetPrice;
optionPrice;
strikePrice;
};
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MarketWatch Class: Updating State
// Check the market and update the
// rates and positions if necessary
void
MarketWatch::update()
{
bool update_flag = false;
double new_rate = Market::getRate();
if (this->rate != new_rate)
{
this->rate = new_rate;
update_flag = true;
}
...
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Updating State
// notify all option positions of
// the market update
if (update_flag)
{
for (int i=0;
i<this->positions.size(); i++)
positions[i].notify(*this);
}
}
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OptionPosition Class
class MarketWatch;
class OptionPosition
{
public:
OptionPosition(mat) :
value(0), maturity(mat);
virtual void notify(MarketWatch* mw);
virtual double getValue()
{
return this->value;
}
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OptionPosition Class (cont.)
protected:
virtual double getPayoff
(double strikePrice, finalPrice)
= 0;
virtual double getCost
(double optionPrice) = 0;
double value;
double maturity;
};
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OptionPosition: notify() Method
void
OptionPosition::notify(MarketWatch* mw)
{
double rate mw->getRate();
double assetPrice = mw->getAssetPrice();
double optionPrice = mw->getOptionPrice();
double strikePrice = mw->getStrikePrice();
this->value() = getCost(optionPrice) +
getPayoff()*((1+rate)^
(-1.0*this->maturity));
}
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OptionPosition: Subclasses
class LongCallOptionPosition :
public class OpenPosition
{
protected:
virtual getCost(double price)
{
return –price;
}
virtual double getPayoff(double strike,
double final)
{
return max(final-strike,0);
}
};
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Observer: Design
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Observer: Analysis
• Intent
– Define a one-to-many dependency between objects, so that when one
object changes state, all its dependents are notified and updated.
• Applicability
– when an abstraction has two aspects, one dependent on another.
– when an object should notify other objects without making concrete
assumptions about them.
• Participants
– Subject (MarketWatch)
• knows its observers.
– Observer (OptionPosition)
• defines a notification and update interface.
– ConcreteObserver(LongCallOptionPosition)
• implements the Observer interface.
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