payoff for a call option
stock price > strike price
become more valuable as stock prices increase and less valuable as strike prices increases
payoff for a put option
strike price > stock price
more valuable as the strike price increases and
less valuable as the stock price increases
both put and call american options become more valuable as the.....
time to expiration increases
not the same for a european put and call!!!!
consider two european call options on a stock: one with an expiration date in one month and the other with an expiration date in two moth. Suppose that a very large dividend is expected in six weeks. The divide
the stock price to decline so that the short life option could be worth more than the long life option
the owner of a call benefits from .....
price increases but has limited downside risk in the event of price decreases bc the most the owner can lose is the price of the option
the owner of a put benefits from....
price decreases but has limited downside risk i the event of price increases
risk free rate affects the price of an option how.....
interest rates in the economy increase the expected return required by investors from the stock tends to increase. PV of any future cash flow received by the holder of the option decrease
these two effects is to increase the value of call options and decr
interest rates rise, stock prices
fall
this combined effect can be to decrease the value of a call option and increase the value of a put option
dividends have the effect of reducing the stock price on the ex dividend date.... this is bad new for the value of _______ and good news for the value of __________
call options
put options
the value of the option is negatively related to the size of the dividend if the option is a call and positively related to......
the size of the dividend if the option is a put.
an american option is worth at least as much as the ......
corresponding european option
C greater than or equal to c
P greater than or equal to p
S0:
current stock price
K
strike price of option
T
time to expiration of option
St
stock price on the expiration date
r
continuous compounded risk free rate of interest for an investment maturing in time T
nominal risk free rate of interest NOT THE REAL
C
value of american call option to buy one share
P
value of american put option to sell one share
c
value of european call option to buy one share
p
value of european put option to sell one share
American or european call option gives the right to buy one share of stock for a certain price.......but the option can never be_________
worth more than the stock. Hence, the stock price is an upper bound to the option price.
c<s0 and C<s0
guaranteed profit (arbitrage opportunity) if bond is exceeded
american put option give the holder the right to ____
sell one share of a stock for K (strike price). No matter how low the stock price becomes the option can never be worth more than K today:
P<K
P:value of american put
european options, we know that at maturity the option cannot be worth more than
K. it follows that it cannot be worth more than the present value of K today:
p<Ke^-rt
r:nom. risk free rate
t: time to expiration
lower bond for the price of a european call option on a non-div. paying stock is
So-Ke^-rT
european put option on a non-dividend paying stock, a lower bond for the price is
Ke^-rt-So
Consider the two portfolios:
A:Euro call on stock + PV of the strike price in cash
C: Euro put on the stock + the stock
both are worth max (St, K) depending on St at the maturity of the options...whats equation
c + Ke^-rT= p+So
reasons for not exercising a call early;
-no income is sacrificed
-we delay paying the strike price
-holding the call provides insurance against stock price falling below strike price
early exercise on american option
there is a chance that an american option will be exercised ...... an exception is an american call on a non div. paying stock (never be exercised early)