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CHAPTER 10 PowerPoint Presentation

CHAPTER 10

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CHAPTER 10

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  1. CHAPTER 10 OPTIONS

  2. OPTIONS • DIFFERENCES BTW OPTIONS AND FUTURES, • AN OPTION CONTRACT PERMITS THE BUYER TO CHOOSE WHETHER OR NOT EXERCISE THE OPTION. IN FUTURES CONTRACT BOTH BUYER AND SELLER TAKE OBLIGATIONS. • BUYER OF AN OPTION CONTRACT PAYS PREMIUM. IN A FUTURE CONTRACT NEITHER PARTY PAYS PREMIUM.

  3. OPTIONS • OPTION WRITER= SELLER OF AN OPTIONS CONTRACT. • OPTION HOLDER= BUYER • CONTRACTS TYPES; • CALL OPTION • PUT OPTION

  4. OPTIONS • OPTION WRITER (SELLER) HAS 3 ALTERNATIVES; • CLOSING UP THE POSITION. • IF THE OPTION BUYER WANTS TO EXERCISE, OPTION WRITER HAS TO OBEY. • IF THE BUYER DO NOT WANT TO EXERCISE, PREMIUM WILL BE HIS GAIN.

  5. OPTIONS • OPTION HOLDER (BUYER) HAS 3 ALTERNATIVES; • HE CAN SELL THE OPTION THAT HE BUYS, • CAN EXERCISE, • WILL NOT EXERCISE, WAIT UNTIL THE EXPIRATION DATE, THE PREMIUM WILL BE HIS LOSS.

  6. OPTIONS • CALL OPTION: PROVIDES THE OPTION BUYER THE RIGHT TO PURCHASE THE UNDERLYING SECURITIES AT PREDETERMINED PRICE. • PUT OPTION: TO SELL THE UNDERLYING SECURITIES AT PREDETERMINED PRICE.

  7. OPTIONS • STRIKE (EXERCISE) PRICE:IT IS THE PRICE AT WHICH THE HOLDER CAN SELL TO OR BUY FROM THE WRITER THE ITEM THAT UNDERLIES THE OPTION. • EXPIRATION DATE: IT IS THE LAST DATE ON WHICH THE HOLDER CAN EXERCISE AN OPTION. • PREMIUM: IS THE PRICE THAT BUYER OF AN OPTION PAYS AND THE WRITER OF AN OPTION RECEIVES.

  8. OPTIONS • TYPES OF OPTIONS; • An America-style option can be exercised by the holder at any time after it is purchased until it expires. • A European-style option may be exercised only on the expiration date. Most exchange-traded stock options (including Turkey’s) are American-style.

  9. OPTIONS • OUT OF MONEY OPTION; • A CALL OPTION IS OUT OF MONEY WHEN EXERCISE PRICE > MARKET PRICE • A PUT OPTION IS OUT OF MONEY WHEN EXERCISE PRICE < MARKET PRICE.

  10. OPTIONS • IN THE MONEY OPTION: • A CALL OPTION IS IN THE MONEY WHEN STRIKE PRICE < MARKET PRICE. • A PUT OPTION IS IN THE MONEY WHEN STRIKE PRICE > MARKET PRICE • AT THE MONEY: • MARKET PRICE = STRIKE PRICE

  11. OPTIONS: STOCK OPTIONS • A STOCK OPTION IS A CONTRACT THAT GIVES ITS HOLDER THE RIGHT, BUT NOT THE OBLIGATION, TO BUY OR SELL SHARES OF THE UNDERLYING SECURITY AT A SPECIFIED PRICE, ON OR BEFORE A GIVEN DATE. • OPTIONS HAVE STANDARDIZED TERMS, INCLUDING THE EXERCISE (STRIKE) PRICE AND EXPIRATION TIME.

  12. OPTIONS • THE CBOE IS THE WORLD’S LARGEST OPTION EXCHANGE. OPTIONS ARE ALSO TRADED ON; • THE AMERICAN STOCK EXCHANGE (AMEX) • THE PACIFIC EXCHANGE (PCX) • THE PHILADELPHIA STOCK EXCHANGE (PHLX)

  13. OPTIONS • OPTIONS ARE NOT LIMITED TO COMMON STOCK. THEY ARE WRITTEN ON; • BONDS • CURRENCIES • FOREIGN EXCHANGE • SPECIFIC INDUSTRIES INDEXES

  14. OPTIONS: INDEX OPTIONS • UNLIKE STOCK OPTIONS, WHERE A STOCK CAN BE DELIVERED IF THE OPTION IS EXERCISED, FOR INDEX OPTIONS, THERE IS NO DELIVERY OF ANY STOCK. THEY ARE CASH SETTLEMENT CONTRACTS.

  15. OPTIONS: CURRENCY OPTIONS • A CURRENCY OPTION GIVES THE BUYER THE RIGHT TO BUY OR SELL A FIXED QUANTITY OF A SPECIFIED CURRENCY IN EXCHANGE FOR A SPECIFIC QUANTITY OF ANOTHER CURRENCY, IN A RATIO DETERMINED BY THE STRIKE PRICE OF THE OPTION.

  16. OPTIONS ON INTEREST RATE • OPTIONS ON INTEREST RATE EXIST FOR BOTH LONG-TERM AND SHORT-TERM FINANCIAL INSTRUMENTS. AMONG THEM U.S. TREASURY NOTES AND BONDS ARE THE MOST POPULAR OPTION CONTRACTS.