FINS1612 Lecture Notes - Lecture 11: Put Option, Call Option, Market Price

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18 May 2018

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Monday, 15 May 2017

Capital Markets & Institution

Options

-Provide asymmetric cover against price movements

-Limit effects of adverse price movements without reducing proﬁts from favourable

price movements

-Involve payment of a premium by buyer to seller (writer)

•Premium - price paid by an option buyer to the writer (seller) of the option

-Option: Gives buyer the right, but not the obligation, to buy or sell a speciﬁed

commodity or ﬁnancial instrument at a predetermined price (exercise or strike price),

on or before a speciﬁed date (expiration date)

•Will only be exercised if in buyer’s best interest

-Types of Options:

•Call option - gives buyer right to buy the commodity/ instrument at exercise price

•Put option - gives buyer right to sell the commodity/ instrument at exercise price

-Options can be exercised either:

•Only on expiration date (European-type)

•Anytime up to expiration date (American-type)

-Exercise/ Strike Price: Price speciﬁed in an options contract at which the option buyer

can buy or sell

-Option Proﬁt & Loss Payoff Proﬁles:

•Call options:

(i) Value of option to buyer/holder (long call party): V = max (S—X, 0) — P

(ii) Value of option to writer (short call party): V = P — max (S—X, 0)

•Put options:

(i) Value of option to buyer/holder (long put party): V = max (X—S, 0) — P

(ii) Value of option to writer (short put party): V = P — max (X—S, 0)

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Monday, 15 May 2017

•Covered option - option writer holds underlying asset or provides a ﬁnancial

guarantee

•Naked option - call option writer does not hold underlying asset

•Risk of loss for buyer of option contract is limited to premium

•Sellers (writers) have unlimited risk & may be subject to margin requirements

unless they write a covered option

•Writer of a call option has written covered option if writer either:

(i) Owns sufﬁcient of the underlying asset to satisfy option contract if exercised

(ii) Is also holder to a call option on same asset, but with lower exercise price

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Document Summary

Limit effects of adverse price movements without reducing pro ts from favourable price movements. Involve payment of a premium by buyer to seller (writer: premium - price paid by an option buyer to the writer (seller) of the option. Types of options: call option - gives buyer right to buy the commodity/ instrument at exercise price, put option - gives buyer right to sell the commodity/ instrument at exercise price. Options can be exercised either: only on expiration date (european-type, anytime up to expiration date (american-type) Exercise/ strike price: price speci ed in an options contract at which the option buyer can buy or sell. Organisation of the market: over the counter - non-standardised contract negotiated between writer & buyer, exchange-traded - standardised nancial contract traded on formal exchange, recorded through a clearing house. Acts as counterparts to buyer & seller, creating two options contracts through process of novation". Allows buyers & sellers to close out (reverse) their contracts.

Related Questions

Problem 2

The writer of a regular exchange-listed put-option on a stock:

Has the right to buy 100 shares of the underlying stock at the market price.

Has the right to sell 100 shares of the underlying stock at the exercise price.

Has the obligation to buy 100 shares of the underlying stock at the exercise price.

Has the obligation to sell 100 shares of the underlying stock at the exercise price.

Has the obligation to buy 100 shares of the underlying stock at the market price.

please really need some help with these questions

Problem 3

Suppose an investor have a put option. What will happen if the stock price on the exercise date is below the exercise price?

A. The seller will need to deliver stock to the owner of the option. B. The seller will be obliged to buy stock from the owner of the option. C. The owner will not exercise his option.
D. The option will extend for nine more months.
E. None of the above options.

Problem 5

Suppose an investor sells one share of stock and buys a call option on the stock. What will be the value of her investment on the final exercise date if the stock price is above the exercise price? (Ignore transaction costs.)

A. The value of two shares of stock.
B. The value of one share of stock plus the exercise price. C. The exercise price.
D. The value of one share of stock minus the exercise price.

E. None of the above options.

Problem 9

All else equal, as the underlying stock price decreases:

A. The put price increases.
B. The put price decreases.
C. The call price increases.
D. There is no effect on put price.
E. The put price can either increase, decrease, or remain the same.

Problem 10

All else equal, as the underlying stock volatility decreases:

A. The put price increases.
B. The put price decreases.
C. The call price increases.
D. There is no effect on put price.
E. The put price can either increase, decrease, or remain the same.

erinbutterfly833

A call option gives the holder (Points : 4) the obligation to buy something the right to sell something the right to buy something the obligation to sell something none of the above Question 2. 2. A call option priced at $2 with a stock price of $30 and an exercise price of $35 allows the holder to buy the stock at (Points : 4) $2 $32 $33 $45 $35 Question 3. 3. A put option in which the stock price is $60 and the exercise price is $65 is said to be (Points : 4) in-the-money out-of-the-money at-the-money exercisable none of the above Question 4. 4. Organized options markets are different from over-the-counter options markets for all of the following reasons except (Points : 4) exercise terms physical trading floor regulation standardized contracts credit risk Question 5. 5. The advantages of the over-the-counter options market include all of the following except (Points : 4) customized contracts privately executed freedom from government regulation lower prices none of the above Question 6. 6. The option price is also referred to as the (Points : 4) strike spread premium fee none of the above Question 7. 7. An investor who exercises a call option on an index must (Points : 4) accept the cash difference between the index and the exercise price purchase all of the stocks in the index in their appropriate proportions from the writer immediately buy a put option to offset the call option immediately write another call option to offset none of the above Question 8. 8. What amount must a call writer pay if a cash-settled index call is exercised? (Points : 4) difference between the index level and the exercise price exercise price difference between the exercise price and the index level index level none of the above Question 9. 9. You are the purchaser of a call option with $5 premium and $145 exercise price. You bought this option when the stock price was $120. If the stock price now is $155, what is the net cash flow to you if you exercise? (Points : 4) $10 $5 $30 $35 Question 10. 10. You are the purchaser of a put option where the premium is $4 and exercise price is $52. You bought this option when the stock price was $52. If the stock price is $42 right now, what is your net cash flow? (Points : 4) negative $14 negative $6 $6 $4 Question 11. 11. You wrote a call option with premium of $5 and exercise price of $55. You sold this when the stock price was $45. If the stock price now is $65, what is your net cash flow? (Points : 4) negative $5 $25 $20 $5 negative $10 Question 12. 12. You wrote a put option with a premium of $3 and exercise price of $22. You sold this option when the stock price was $25. If the stock price is $22 now, what is your net cash flow? (Points : 4) $6 $3 negative $3 $0 negative $6 Question 13. 13. The maximum gain of the writer of a put option with a premium of $3 and an exercise price of $120 is: (Points : 4) $120 $117 $3 $123 unlimited Question 14. 14. The maximum gain of the purchaser of a put option with a premium of $3 and exercise price of $120 would be: (Points : 4) unlimited $120 $117 $3 $123 Question 15. 15. The maximum gain of the writer of a call option with a premium of $3 and an exercise price of $120 would be (Points : 4) unlimited $3 $117 $120 $123 Question 16. 16. The maximum gain of the purchaser of a call option with a premium of $3 and an exercise price of $120 would be (Points : 4) unlimited $120 $117 $123 $3 Question 17. 17. You have the following information: Put: X=$40, Premium=$4 Call: X=$50, Premium=$6 You bought the stock at $45 Scenarios: S=20, S=45, S=90 Given above information, please calculate the net payouts for a protective put strategy for each different scenario. (Points : 4) -$9, -$4, $41 $25, $0, $0 -$5, $-9, $0 $16, -$4, $45 Question 18. 18. You have the following information: Put: X=$40, Premium=$4 Call: X=$50, Premium=$6 You bought the stock at $45 Scenarios: S=20, S=45, S=90 Given above information, please calculate the net payouts for a covered call strategy for each different scenario. (Points : 4) $6, $6, $11 $6, $0, $51 -$19, $6, $11 -$19, $6, $51 -$6, -$6,$45 Question 19. 19. You have the following information: Put: X=$40, Premium=$4 Call: X=$50, Premium=$6 You bought the stock at $45 Scenarios: S=20, S=45, S=90 Given above information, please calculate the net payouts for a collar strategy for each different scenario. (Points : 4) -$3, $2, $7 -$9, $6, $11 $16, $2, $52 -$4, $0, $6 Question 20. 20. You have the following information: S=65, X=60, T=1, r=0, C=7, P=4 Evaluating the situation from a Put-Call Parity framework, what steps would you take to implement an arbitrage strategy? (Points : 4) Sell Call, Buy Put, Short Stock, Invest remainder Sell Call, Buy Put, Buy Stock, Borrow remainder Buy Call, Sell Put, Buy Stock, Borrow remainder Buy Call, Sell Put, Short Stock, Invest remainder Buy Call, Sell Put, Short Stock, Borrow remainder Question 21. 21. Given the information and the solution you found for Question #20, what is the arbitrage amount? (Points : 4) If S>X, then $6 and if SX, the arbitrage will be $4 If S>X, then $3 and if SX, then $2 and if SX, the arbitrage will be $2 Question 22. 22. You have the following information: S=26, X=20, T=2, r=3.4%, C=15, P=6 Evaluating the situation from a Put-Call Parity framework, what steps would you take to implement an arbitrage strategy? (Points : 4) Sell Call, Buy Put, Buy Stock, Borrow remainder Sell Call, Buy Put, Short Stock, Invest reaminder Buy Call, Sell Put, Buy Stock, Borrow remainder Buy Call, Sell Put, Buy Stock, Invest remainder Buy Call, Sell Put, Short Stock, Invest remainder Question 23. 23. Using the information and the solution from Question #22, what would be the final arbitrage amount? (approximately) (Points : 4) If S>X or SX then $9, if SX or SX then $3, if SX or S

orchidporcupine923

I. Fill in the blank using a number of terms listed below (@1 point). Annuity due, Asset Mgmt ratio, Call, Comparisons, Comparative ratio analysis, Corporation, Covered, Current Ratio, DSO, Du Pont Equation , Equal, Future performance, Greater, Higher, In-the-money, Less, Liquidity, Lower, Option, Ordinary Annuity, Out-of-the-money, Percentage, Perpetuity, Put, PV, Quick, Reduced, TIE, TATO, Trend Analysis, Writer 11. The payment or receipt of equal amounts, at the end of a series of equal periods, for a specified amount of time is called a(n) _______________. 12. When a loan is amortized over a five year term, the amount of interest paid is ________________ each year. 13. You have just won a $5 million lottery to be received in twenty annual equal payments of $250,000. What will happen to the present value of your winnings if the interest rate increases? It will be worth _________________. 14. The more frequent the compounding the _________________ the effective interest rate. 15. More frequent compounding results in _______________ future values and _______________ present values than less frequent compounding at the same nominal interest rate. 16. A(n) _______________ is a financial instrument that agrees to pay an equal amount of money per period into the indefinite future (i.e. forever). 17. A(n) _________________ is a contract which gives its holder the right to buy(or sell) an asset at some predetermined price within a specified period of time. 18. The seller of an option is called the option __________________. 19. An investor who writes call options against stock held in his or her portfolio is said to be selling _______________ options. 20. When the exercise price exceeds the current stock price, a call option is said to be _____________________; however, when the exercise price is less than the current price of the underlying stock, a call option is _________________. 21. An option which gives you the right to sell a stock at a specified price within some future period is called a(n) ______________ option.

FINS1612 Lecture Notes - Lecture 11: Put Option, Call Option, Market Price

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