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					Chapter 9

    Financial Options and
   Applications in Corporate
            Finance

                               1
Topics in Chapter

n   Financial Options




                        2
What is a financial option?
n   An option is a contract which gives its
    holder the right, but not the obligation,
    to buy (or sell) an asset at some
    predetermined price within a specified
    period of time.




                                                3
What is the single most important
characteristic of an option?
n   It does not obligate its owner to take
    any action. It merely gives the owner
    the right to buy or sell an asset.




                                             4
Option Terminology
n   Call option: An option to buy a
    specified number of shares of a security
    within some future period.
n   Put option: An option to sell a specified
    number of shares of a security within
    some future period.


                                            5
Option Terminology
n   Strike (or exercise) price: The price
    stated in the option contract at which
    the security can be bought or sold.
n   Option price: The market price of the
    option contract.




                                             6
Option Terminology
(Continued)
n   Expiration date: The date the option
    matures.
n   Exercise value: The value of a call
    option if it were exercised today =
    Current stock price - Strike price.
n   Note: The exercise value is zero if the
    stock price is less than the strike price.

                                                 7
Option Terminology
(Continued)
n   Covered option: A call option written
    against stock held in an investor’s
    portfolio.
n   Naked (uncovered) option: An option
    sold without the stock to back it up.




                                            8
Option Terminology
(Continued)
n   In-the-money call: A call whose strike
    price is less than the current price of
    the underlying stock.
n   Out-of-the-money call: A call option
    whose strike price exceeds the current
    stock price.


                                              9

				
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posted:7/14/2013
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