FINE 342 Lecture Notes - Lecture 6: Put Option, Option Style, Call Option
21 Jun 2017
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Today (t1), need copper in three months (t2). Fear of a price increase: at (t1): s1 = . 40 and long futures with f1 = . 45, at (t2): s2 = . 60 and short futures with f2 = . 60. Pro: companies should focus on main business and take steps to minimize market risks. Shareholders usually well diversified and can make own hedging decisions: may increase risk to hedge when competitors do not. Explaining situation where there is loss on hedge and gain on underlying can be difficult. Lecture overview: understand features of call and put options, differentiate american and european-style options. Identify factors that impact value of option: options basics. Options give right but not obligation to deal with asset. Call option: gives holder right but not obligation to buy asset: Exercise option to buy underlying asset if market value of asset greater than strike price: at exercise or strike price, on or before expiration date, payoff =max[(cid:882),t ]
