BU283 Lecture Notes - Lecture 19: Ceteris Paribus, Arbitrage, Option Style
Document Summary
An option is a contract giving its owner the right to buy or sell an asset at a fixed price before a given date. Exercising the option is the act of buying or selling the underlying asset. The fixed buy or sell price for the underlying asset is the option"s strike or exercise price. The maturity date of the option is its exercise date. An american option can be exercised anytime until expiration. An european option can only be exercised on the exercise date. A put gives the owner the right to sell. If exercised then the put writer is obliged to buy the underlying asset. Profit = payoff purchase price = - = . This is your maximum loss if the company goes bankrupt. Definitions: payoff = proceeds from selling, profits = payoff purchase price. Payoff to owning a share: payoff = st (stock price at date t)
