advanced corporate finance

Topics: Call option, Put option, Option Pages: 38 (4808 words) Published: October 18, 2014
LYON | SHANGHAI

EDUCATING ENTREPRENEURS FOR THE WORLD

ADVANCED CORPORATE FINANCE
BELZE Loïc
Financial Options
Lecture 7 – Chapter 20

ADVANCED CORPORATE FINANCE – BELZE Loïc – Adapted from 2011 Berk & DeMarzo Pearson Education

7 - 20 - 1

www.em-lyon.com

© EMLYON School
EMLYON Business 2011

Chapter Outline







20.1 – Option Basics
20.2 – Option Payoffs at Expiration
20.3 – Put-Call Parity
20.4 – Factors Affecting Option Prices
20.5 – Exercising Options Early
20.6 – Options and Corporate Finance

ADVANCED CORPORATE FINANCE – BELZE Loïc – Adapted from 2011 Berk & DeMarzo Pearson Education

7 - 20 - 2

EMLYON Business School

Learning Objectives
1. Define the following terms: call option, put option, exercise price, strike price, exercising the option, expiration date, American option, European option, in-the-money, and out-of-the-money.
2. Compute the value of a call or a put option at expiration. 3. List the rights and obligations of the buyer of the option and the seller of the option.
4. Use put-call parity to solve for the call premium, the put premium, the stock price, the strike price, or the dividend.
5. Discuss the following factors that influence call and put option values: stock price, strike price, and volatility.

ADVANCED CORPORATE FINANCE – BELZE Loïc – Adapted from 2011 Berk & DeMarzo Pearson Education

7 - 20 - 3

EMLYON Business School

1

Learning Objectives
6. Describe arbitrage bounds for option prices.
7. Explain why it is never optimal to exercise an American
call option early on a non-dividend-paying stock, and why
it is sometimes optimal to exercise an American put
option early.
8. Explain the use of option modeling to value equity.
9. Describe how corporate debt can be viewed as a portfolio
of riskless debt and a short position in a put option.

ADVANCED CORPORATE FINANCE – BELZE Loïc – Adapted from 2011 Berk & DeMarzo Pearson Education

7 - 20 - 4

EMLYON Business School

20.1 Option Basics
 Financial Option
• A contract that gives its owner the right (but not the
obligation) to purchase or sell an asset at a fixed price
as some future date

 Call Option
• A financial option that gives its owner the right to buy an asset

ADVANCED CORPORATE FINANCE – BELZE Loïc – Adapted from 2011 Berk & DeMarzo Pearson Education

7 - 20 - 5

EMLYON Business School

20.1 Option Basics
 Put Option
• A financial option that gives its owner the right to sell an asset

 Option Writer
• The seller of an option contract

ADVANCED CORPORATE FINANCE – BELZE Loïc – Adapted from 2011 Berk & DeMarzo Pearson Education

7 - 20 - 6

EMLYON Business School

2

Understanding Option Contracts
 Exercising an Option
• When a holder of an option enforces the agreement
and buys or sells a share of stock at the agreed-upon
price

 Strike Price (Exercise Price)
• The price at which an option holder buys or sells a
share of stock when the option is exercised

 Expiration Date
• The last date on which an option holder has the right
to exercise the option

ADVANCED CORPORATE FINANCE – BELZE Loïc – Adapted from 2011 Berk & DeMarzo Pearson Education

7 - 20 - 7

EMLYON Business School

Understanding Option Contracts
 American Option
• Options that allow their holders to exercise the option
on any date up to, and including, the expiration date

 European Option
• Options that allow their holders to exercise the option
only on the expiration date
> Note: The names American and European have nothing to do
with the location where the options are traded.

ADVANCED CORPORATE FINANCE – BELZE Loïc – Adapted from 2011 Berk & DeMarzo Pearson Education

7 - 20 - 8

EMLYON Business School

Understanding Option Contracts
 The option buyer (holder)
• Holds the right to exercise the option and has a long position in the contract

 The option seller (writer)
• Sells (or writes) the option and...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Case 2 for Advanced Corporate Finance Essay
  • Corporate Finance Essay
  • Essay about Corporate Finance
  • Corporate Finance Essay
  • Corporate Finance Essay
  • Corporate Finance Essay
  • Corporate Finance (ECON W4280) Essay
  • The Bible And Corporate Finance Research Paper

Become a StudyMode Member

Sign Up - It's Free