chap023.ppt
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This document discusses options, including call and put options, option terminology, how option values are determined, and the Black-Scholes option pricing model. It covers various types of options including options on real assets like expansion options, options on financial assets like warrants, and how options can be used in strategies like protective puts and straddles.
![Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved
McGraw-Hill/Irwin
23- 16
Option Value
Black-Scholes Option Pricing Model
OC = Ps[N(d1)] - S[N(d2)]e-rt](https://image.slidesharecdn.com/chap023-221123150837-1b0bd9e6/85/chap023-ppt-16-320.jpg)
chap023.ppt
- 1. Chapter 23 Fundamentals of Corporate Finance Fifth Edition Slides by Matthew Will McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved Options
- 2. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 23- 2 Topics Covered Calls and Puts What Determines Option Values Spotting the Option
- 3. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 23- 3 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.
- 4. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 23- 4 Option Obligations Buyer Seller Call option Right to buy asset Obligation to sell asset Put option Right to sell asset Obligation to buy asset
- 5. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 23- 5 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 $180 0 0 0 20 40 Value Put 40 20 0 0 0 Value Call 220 200 180 160 $140 Price Stock
- 6. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 23- 6 Option Value Call option value (graphic) given a $180 exercise price. Share Price Call option value 180 220 $40
- 7. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 23- 7 Option Value Put option value (graphic) given a $180 exercise price. Share Price Put option value 140 180 $40
- 8. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 23- 8 Option Value Call option payoff (to seller) given a $180 exercise price. Share Price Call option $ payoff 180
- 9. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 23- 9 Option Value Put option payoff (to seller) given a $180 exercise price. Share Price Put option $ payoff 180
- 10. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 23- 10 Option Value Protective Put - Long stock and long put Share Price Position Value Protective Put Long Put Long Stock
- 11. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 23- 11 Option Value Protective Put - Long stock and long put Share Price Position Value Protective Put
- 12. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 23- 12 Option Value Straddle - Long call and long put - Strategy for profiting from high volatility Share Price Position Value Straddle Long put Long call
- 13. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 23- 13 Option Value Straddle - Long call and long put - Strategy for profiting from high volatility Share Price Position Value Straddle
- 14. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 23- 14 Option Value Stock Price Upper Limit Lower Limit (Stock price - exercise price) or 0 which ever is higher
- 15. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 23- 15 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)
- 16. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 23- 16 Option Value Black-Scholes Option Pricing Model OC = Ps[N(d1)] - S[N(d2)]e-rt
- 17. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 23- 17 Options on Real Assets Real Options - Options embedded in real assets
- 18. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 23- 18 Options on Real Assets Real Options - Options embedded in real assets Option to Expand Option to Abandon
- 19. Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin 23- 19 Options on Financial Assets Warrants - Right to buy shares from a company at a stipulated price before a set date. Convertible Bond - Bond that the holder may exchange for a specific number of shares. Callable Bond - Bond that may be repurchased by the issuer before maturity at specified call price.