tailieunhanh - Lecture Financial markets - Lecture 21: Options markets

In this chapter, the following content will be discussed: Definition of options, black-scholes formula, chicago board options exchange, the use of options in hedging and speculation, increasing scope of options contracts in the future. | Lecture 21: Options Markets Options With options, one pays money to have a choice in the future Essence of options is not that I buy the ability to vacillate, or to exercise free will. The choice one makes actually depends only on the underlying asset price Options are truncated claims on assets Options Exchanges Options are as old as civilization. Option to buy a piece of land in the city Chicago Board Options Exchange, a spinoff from the Chicago Board of Trade 1973, traded first standardized options American Stock Exchange 1974, NYSE 1982 Terms of Options Contract Exercise date Exercise price Definition of underlying and number of shares Two Basic Kinds of Options Calls, a right to buy Puts, a right to sell Options prices from WSJ April 10, 2002 Two Basic Kinds of Options American options – can be exercised any time until exercise date European options – can be exercised only on exercise date Buyers and Writers For every option there is both a buyer and a writer The buyer pays the writer for the ability to choose when to exercise, the writer must abide by buyer’s choice Buyer puts up no margin, naked writer must post margin In and Out of the Money In-the-money options would be worth something if exercised now Out-of-the-money options would be worthless if exercised now Put-Call Parity Relation Put option price – call option price = present value of strike price + present value of dividends – price of stock For European options, this formula must hold (up to small deviations due to transactions costs), otherwise there would be arbitrage profit opportunities Limits on Option Prices Call should be worth more than intrinsic value when out of the money Call should be worth more than intrinsic value when in the money Call should never be worth more than the stock price Binomial Option Pricing Simple up-down case illustrates fundamental issues in option pricing Two periods, two possible outcomes only Shows how option price can be derived from no-arbitrage-profits . | Lecture 21: Options Markets Options With options, one pays money to have a choice in the future Essence of options is not that I buy the ability to vacillate, or to exercise free will. The choice one makes actually depends only on the underlying asset price Options are truncated claims on assets Options Exchanges Options are as old as civilization. Option to buy a piece of land in the city Chicago Board Options Exchange, a spinoff from the Chicago Board of Trade 1973, traded first standardized options American Stock Exchange 1974, NYSE 1982 Terms of Options Contract Exercise date Exercise price Definition of underlying and number of shares Two Basic Kinds of Options Calls, a right to buy Puts, a right to sell Options prices from WSJ April 10, 2002 Two Basic Kinds of Options American options – can be exercised any time until exercise date European options – can be exercised only on exercise date Buyers and Writers For every option there is both a buyer and a writer The buyer pays the .