Chapter 22
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Date Submitted: 06/04/2013 07:31 PM
Chapter 24 Options and Corporate Finance I
2013/05/03 Course Lecture of Corporate Finance
Outline
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4. 5. 6.
Options; Call Options; Put Options; Selling Options; Combinations of Options; Valuing Options.
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22.1 Options
An option is a contract giving its owner the right to buy or sell an asset at a fixed price on or before a given date. Exercising the Option
The act of buying or selling the underlying asset.
Strike Price or Exercise Price
The fixed price in the option contract at which the holder can buy or sell the underlying asset.
The maturity date of the option.
Expiration Date
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Options types
European versus American options
European options can be exercised only at expiry. American options can be exercised at any time up to expiry. Exercising the option would result in a positive payoff. Exercising the option would result in a zero payoff (i.e., exercise price equal to spot price). Exercising the option would result in a negative payoff.
In-the-Money
At-the-Money
Out-of-the-Money
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22.2 Call options
A call option gives the owner the right to buy an asset at a fixed price during a particular period. Ex, a call option on IBM stock enables an investor to buy 100 shares of IBM on or before September 19 at an exercise price of $100.
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The value of a call option at expiration
If stock price of IBM is $130 at expiration. The buyer of the call option has the right to exercise the call. Having the right to buy IBM for $100. The value of this right is $30 (=$130-$100). If IBM’s stock price is less than $100 on the expiration date, the value of the call option will be $0. The payoff of the call option at expiration is
Payoff on the expiration date If stock price is less than $100 Call option value $0 If stock price is greater than $100 Stock...
