Financial Options and Applications in Cororate Finance

Financial Options and Application in Corporate Finance

John Tapley

Wayland Baptist University

Dr. Chukuma Achebe

April 29, 2016

Assume that you have just been hired as a financial analyst by Triple Play Inc., a mid-sized California company that specializes in creating high-fashion clothing. Since no one at Triple Play is familiar with the basics of financial options, you have been asked to prepare a brief report that the firm's executives could use to gain at least a cursory understanding of the topics.

To begin, you gathered some outside materials on the subject and used these materials to draft a list of pertinent questions that need to be answered. In fact, one possible approach to the paper is to use a question-and-answer format. Now that the questions have been drafted, you have to develop the answers.

a. What is a financial option? An option is a contract which gives its holder the right, but not the obligation, to buy (or sell) an asset at some predetermined price within a specified period of time. What is the single most important characteristics of an option? It does not obligate its owner to take any action. It merely gives the owner the right to buy or sell an asset.

b. Options have a unique set of terminology. Define the following terms:

(1) Call option gives its owner the right to buy a share of stock at a fixed price.

(2) Put option gives its owners the right to sell a share of stock at a fixed strike price.

(3) Strike price or exercise price is the price at which you exercise the option.

(4) Expiration date, after which the option may not be exercised.

(5) Exercise value, any profit from immediately exercising an option.

(6) Option price, The market price of the option contract

(7) Time value, the difference between options price and its exercise value.

(8) Writing an option, new options issues by investors.

(9) Covered option, a call option written against stock held in an investor’s...