1 / 33

Understanding Options: Valuation and Strategies in Corporate Finance

This resource provides an in-depth overview of options, including calls and puts, their structures, and valuation methods. Key concepts such as financial alchemy with options, the factors determining option value, and the utilization of the Black-Scholes Option Pricing Model are critically examined. The document offers practical examples of calculating call and put prices, alongside discussions on various strategies including protective puts and straddles. Aimed at finance students and professionals, this guide is essential for mastering options in corporate finance.

inga
Télécharger la présentation

Understanding Options: Valuation and Strategies in Corporate Finance

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Principles of Corporate Finance Brealey and Myers Sixth Edition • Spotting and Valuing Options Slides by Matthew Will Chapter 20 Irwin/McGraw Hill • The McGraw-Hill Companies, Inc., 2000

  2. Topics Covered • Calls, Puts and Shares • Financial Alchemy with Options • What Determines Option Value • Option Valuation

  3. Option Terminology Call Option Right to buy an asset at a specified exercise price on or before the exercise date.

  4. Option Terminology Put Option Right to sell an asset at a specified exercise price on or before the exercise date. Call Option Right to buy an asset at a specified exercise price on or before the exercise date.

  5. Option Obligations

  6. Option Value • The value of an option at expiration is a function of the stock price and the exercise price.

  7. Option Value • The value of an option at expiration is a function of the stock price and the exercise price. Example - Option values given a exercise price of $85

  8. Option Value Call option value (graphic) given a $85 exercise price. Call option value $20 85 105 Share Price

  9. Option Value Put option value (graphic) given a $85 exercise price. Put option value $5 80 85 Share Price

  10. Option Value Call option payoff (to seller) given a $85 exercise price. Call option $ payoff 85 Share Price

  11. Option Value Put option payoff (to seller) given a $85 exercise price. Put option $ payoff 85 Share Price

  12. Option Value Protective Put - Long stock and long put Long Stock Position Value Share Price

  13. Option Value Protective Put - Long stock and long put Long Put Position Value Share Price

  14. Option Value Protective Put - Long stock and long put Long Stock Protective Put Position Value Long Put Share Price

  15. Option Value Protective Put - Long stock and long put Protective Put Position Value Share Price

  16. Option Value Straddle - Long call and long put - Strategy for profiting from high volatility Long call Position Value Share Price

  17. Option Value Straddle - Long call and long put - Strategy for profiting from high volatility Long put Position Value Share Price

  18. Option Value Straddle - Long call and long put - Strategy for profiting from high volatility Straddle Position Value Share Price

  19. Option Value Straddle - Long call and long put - Strategy for profiting from high volatility Straddle Position Value Share Price

  20. Option Value Stock Price Upper Limit

  21. Option Value Stock Price Upper Limit Lower Limit (Stock price - exercise price) or 0 whichever is higher

  22. Option Value Components of the Option Price 1 - Underlying stock price 2 - Striking or Exercise price 3 - Volatility of the stock returns (standard deviation of annual returns) 4 - Time to option expiration 5 - Time value of money (discount rate)

  23. Option Value Black-Scholes Option Pricing Model OC = Ps[N(d1)] - S[N(d2)]e-rt

  24. Black-Scholes Option Pricing Model OC = Ps[N(d1)] - S[N(d2)]e-rt OC- Call Option Price Ps - Stock Price N(d1) - Cumulative normal density function of (d1) S - Strike or Exercise price N(d2) - Cumulative normal density function of (d2) r - discount rate (90 day comm paper rate or risk free rate) t - time to maturity of option (as % of year) v - volatility - annualized standard deviation of daily returns

  25. Black-Scholes Option Pricing Model Ps S v2 2 ln + ( r + ) t (d1)= v t N(d1)= 32 34 36 38 40

  26. Cumulative Normal Density Function Ps S v2 2 ln + ( r + ) t (d1)= v t (d2) = d1 - v t

  27. Call Option Example What is the price of a call option given the following? P = 36 r = 10% v = .40 S = 40 t = 90 days / 365

  28. Call Option Example What is the price of a call option given the following? P = 36 r = 10% v = .40 S = 40 t = 90 days / 365 Ps S v2 2 ln + ( r + ) t (d1) = v t (d1) = - .3070 N(d1) = 1 - .6206 = .3794

  29. Call Option Example What is the price of a call option given the following? P = 36 r = 10% v = .40 S = 40 t = 90 days / 365 (d2) = d1 - v t (d2) = - .5056 N(d2) = 1 - .6935 = .3065

  30. Call Option Example What is the price of a call option given the following? P = 36 r = 10% v = .40 S = 40 t = 90 days / 365 OC = Ps[N(d1)] - S[N(d2)]e-rt OC = 36[.3794] - 40[.3065]e - (.10)(.2466) OC = $ 1.70

  31. Put - Call Parity Put Price = Oc + S - P - Carrying Cost + Div. Carrying cost = r x S x t

  32. Put - Call Parity Example ABC is selling at $41 a share. A six month May 40 Call is selling for $4.00. If a May $ .50 dividend is expected and r=10%, what is the put price?

  33. Put - Call Parity Example ABC is selling at $41 a share. A six month May 40 Call is selling for $4.00. If a May $ .50 dividend is expected and r=10%, what is the put price? Op = Oc + S - P - Carrying Cost + Div. Op = 4 + 40 - 41 - (.10x 40 x .50) + .50 Op = 3 - 2 + .5 Op = $1.50

More Related