Options Pricing

Question 1

About pricing options
(Time value and intrinsic value)

Answer 1

Option Value dived by
Time Value
Instrisic value

Market price (optn) =
exercise (intrinsic)
+ time value

Intrinsic value
Max (0, S - x ) call
(0, X - S) put

Vol and Rf only affects the Time Value

Question 2

Call and Put functions

Answer 2

When the factors INCREASE

Call
S (+) , X ( -) , Rf (+), vol (+), Time (-)

Put
S(-) , X (+) , Rf (-), Vol (+), Time (-)

Question 3

When exercise price is zero?

Answer 3

Call / put out off money

Question 4

Which one of the participants of the option contract can default?

Answer 4

The short (who sold) the option.

The long position only pays the premium

Question 5

Values of contingent options

Answer 5

Exercise value (Call)

Max= St
Min = 0, St - X (1+Rf) ^ -(T-t)

St - X
——
(1+Rf) ^ (T-t)

Put
Max = X (1+Rf) ^ - (T-t)
Min = 0, X [(1+Rf) ^ - (T-t) ]— St

  X  ———-          -   St (1+Rf) ^ (T-t)

Question 6

What is the Time value on maturity?

Answer 6

Zero!

Question 7

Easy Payoff remembering (st and X)
For call and put

Answer 7

Call = st- X
Put = X - St