Exam 3 - Chapter 15 [Slides] Flashcards
Options are ____
Betting
Two options
- Call option contract
2. Put option contract
Call option contract
Right to sell
Pit option contract
Right to sell
Call option contract
The right, not the obligation, to buy an asset at a specified exercise price on or before specified expiration date.
Put option contract
The right, not the obligation, to sell an asset at a spice I fed exercise price on or before specified expiration date
The higher call option that you are willing to pay is called the
Option premium
In the money
Exercise would generate positive cash flow
Out of the money
Exercise would generate negative cash flow
At the money
Exercise price qualms asset price
What would you do if you have just obtained the option for free?
Choice 1: exercise it now if you u can
Choice 2: put off the exercise
Choice 3: sell it negotiable?
Why out of the options valuable?
It can change into them oeny
An asset ->
Underlying asset
Exercise price -> _____ price
Strike
Exercise only at expiratioin -> ____ option
European
Exercise on or before expiration -> ______ option
American option
Sell short stocks
Need to borrow
Sell short options
No need to borrow
Options trading on organized exchanges
Standardized by allowable expiration date, exercise price and contract size
Why standardized ?
- Ease of trading
- liquid secondary market
You do not need to know your _______
Counterparts
The “Option Clearing Coportation” guarantees the ________ _____
Contract performance
Options Clearing Coportation
- Jointy owned by exchanges
- Arranges exercised option through member firms
- Require option writers to post margin
Underlying assets
- individual stocks
- index
- currency
- interest rate
- futures
- and many others
Payoff at expiration
The payoff at expiration of a purchased the call with a $80 strike price
Profit at exportation
The profit at exploitation of ap ruchased 6-month call Edith strike price of $80
Callable bonds
Issued with coupon rate higher than the one of, otherwise identical, straight debt
- inventor;’s compensation for call option retrained by issuer
Usually include call protection period
Convertible securities
- convey options to holder rather than issuer
- typically give holder right to exchange for common stock, regardless of market price
Warrants
Options issued by firm to purchase shares of firm’s stock
Collateralized Loans
- Nonresource loan
- No resource beyond right to collateral
Equity of the firm as a call option
Underlying asset?
Strike Price
Expiration
Rain check
-
Asian options
Options with payoffs that depend on average price of underlying asset during portion of option life
Currency Translated options
Have either asset or exercise price denominated in foreign currency
Digital options
Have fixed payoffs that depend on the price of underlying asset
