Corporate Finance Ch. 17

7/17/2019 Corporate Finance Ch. 17

1/63

17-1

OPTIONS AND CORPORATE FINANCE

Chapter 17

Copyright 2014 McGraw-Hill Education. All rights rsr!d. "o rproduction or distri#ution without th prior writtn consnt o$ McGraw-Hill Education.


2/63

17-2

KEY CONCEPTS AND SKILLS

Define option terminolog

Determine option paoff! an" profit!

De!#ri$e the ma%or "eterminant! of option pri#e!

&ra!p an" appl p't(#all parit

Determine option pri#e! '!ing the $inomial an")la#*(S#hole! mo"el!


3/63

17-%

C+APTER O,TLINE

17-1 Option!17-. Call Option!17-/ P't Option!17-0 Selling Option!17- Option 2'ote!17-3 Com$ination! of Option!

17-7 4al'ing Option!17-5 An Option Pri#ing Form'la17-6 Sto#*! an" )on"! a! Option!


4/63

17-4

17-1 OPTIONS

An option gie! the hol"er the right8 but not theobligation8 to $' or !ell a gien 9'antit of ana!!et on :or $efore; a gien "ate8 at pri#e!

agree" 'pon to"a- E


5/63

17-&

OPTIONS

E'ropean er!'! Ameri#an option! E'ropean option! #an $e e


6/63

17-'

17-. CALL OPTIONS

Call option! gie the hol"er theright8 $'t not the o$ligation8 to

buya gien 9'antit of !omea!!et on or $efore !ome timein the f't're8 at pri#e! agree"

'pon to"a-@hen e


7/6317-7

CALL OPTION PRICIN& AT EPIRY

At ea


8/6317-(

CALL OPTION PAYOFFS

20

12020 40 60 80 100

40

20

40

60

Stock price ($)

Op

tionpayoffs($)

)uy

acall

E*rcis pric + ,&0

50


9/6317-

CALL OPTION PROFITS

E*rcis pric + ,&0 option pr/iu/ + ,10

)uy a call

20

12020 40 60 80 100

40

20

40

60

Stock price ($)

O

ptionpayoffs($)

50

10

10


10/6317-10

17-/ P,T OPTIONS

P't option! gie the hol"er theright8 $'t not the o$ligation8 to

sella gien 9'antit of ana!!et on or $efore !ome timein the f't're8 at pri#e! agree"

'pon to"a-@hen e


11/6317-11

P,T OPTION PRICIN& AT EPIRY

At e


12/63

17-12

P,T OPTION PAYOFFS

20

0 20 40 60 80 100

40

20

0

40

60

Stock price ($)

O

ptionpayoffs($)

)uy a put

E*rcis pric + ,&0

50

50


13/63

17-1%

P,T OPTION PROFITS

20

20 40 60 80 100

40

20

40

60

Stock price ($)

O

ptionpayoffs($)

)uy a put

E*rcis pric + ,&0 option pr/iu/ + ,10

10

10

50


14/63

17-14

OPTION 4AL,E

Intrin!i# 4al'e Call >a


15/63

17-1&

17-0 SELLIN& OPTIONS

The !eller :or =riter; of an option ha! anobligation-

The !eller re#eie! the option premi'm in

e


16/63

17-1'

CALL OPTION PAYOFFS

20

12020 40 60 80 100

40

20

40

60

Stock price ($)

O

ptionpayoffs($)

4llacallE*rcis pric + ,&0

50


17/63

17-17

P,T OPTION PAYOFFS

20

0 20 40 60 80 100

40

20

0

40

50

Stock price ($)

O

ptionpayoffs($)

ll a put

E*rcis pric + ,&0

50


18/63

17-1(

OPTION DIA&RA>S RE4ISITED

E*rcis pric + ,&0

option pr/iu/ + ,10ll a call

)uy a call

50 6040 100

40

40

Stock price ($)

Optionpayoffs($)

)uy a put

ll a put

10

10

)uy a call

4llaput

)uyaput

ll a call


19/63

17-1

17- OPTION 2,OTES

Option/Strike Exp. Vol. Last Vol. Last

IBM 130 Oct 364 15 107 5

138 130 Jan 112 19 420 9138 135 Jul 2365 4 2431 13/16

138 135 Aug 1231 9 94 5

138 140 Jul 1826 1 427 2

138 140 Aug 2193 6 58 7

--Put----Call--


20/63

17-20

OPTION 2,OTES


IBM 130 Oct 364 15 107 5

138 130 Jan 112 19 420 9

138 135 Jul 2365 4 2431 13/16

138 135 Aug 1231 9 94 5

138 140 Jul 1826 1 427 2

138 140 Aug 2193 6 58 7

--Put----Call--

6his option has a stri pric o$ ,1%&

a rcnt pric $or th stoc is ,1%(.2&

8uly is th *piration /onth.


21/63

17-21

OPTION 2,OTES


IBM 130 Oct 364 15 107 5138 130 Jan 112 19 420 9

138 135 Jul 2365 4 2431 13/16

138 135 Aug 1231 9 94 5

138 140 Jul 1826 1 427 2138 140 Aug 2193 6 58 7

--Put----Call--

6his /as a call option with this *rcis pric in-th-/ony #y ,%.2& + ,1%(9 : ,1%&.

uts with this *rcis pric ar out-o$-th-/ony.


22/63

17-22

OPTION 2,OTES


IBM 130 Oct 364 15 107 5

138 130 Jan 112 19 420 9

138 135 Jul 2365 4 2431 13/16138 135 Aug 1231 9 94 5

138 140 Jul 1826 1 427 2

138 140 Aug 2193 6 58 7

--Put----Call--

n this day; 2;%'& call options with this *rcis pric wr

tradd.


23/63

17-2%

OPTION 2,OTES


IBM 130 Oct 364 15 107 5

138 130 Jan 112 19 420 9138 135 Jul 2365 4 2431 13/16

138 135 Aug 1231 9 94 5

138 140 Jul 1826 1 427 2

138 140 Aug 2193 6 58 7

--Put----Call--

6h CA


24/63

17-24

OPTION 2,OTES


IBM 130 Oct 364 15 107 5

138 130 Jan 112 19 420 9138 135 Jul 2365 4 2431 13/16

138 135 Aug 1231 9 94 5

138 140 Jul 1826 1 427 2

138 140 Aug 2193 6 58 7

--Put----Call--

n this day; 2;4%1 put options with this

*rcis pric wr tradd.


25/63

17-2&

OPTION 2,OTES


IBM 130 Oct 364 15 107 5138 130 Jan 112 19 420 9

138 135 Jul 2365 4 2431 13/16

138 135 Aug 1231 9 94 5

138 140 Jul 1826 1 427 2138 140 Aug 2193 6 58 7

--Put----Call--

6h =6 option with a stri pric o$ ,1%& is trading $or ,.(12&.

inc th option is on 100 shars o$

stoc; #uying this option would

cost ,(1.2& plus co//issions.


26/63

17-2'

17-3 CO>)INATIONS OF OPTIONS

P't! an" #all! #an !ere a!the $'il"ing $lo#*! for more

#omple< option #ontra#t!- If o' 'n"er!tan" thi!8 o'#an $e#ome a finan#ial

engineer8 tailoring the ri!*(ret'rn profile to meet o'r#lient! nee"!-


27/63

17-27

PROTECTI4E P,T STRATE&Y:PAYOFFS;

)uy a put with an *rcis

pric o$ ,&0

)uy th

stoc

rotcti! ut payo$$s

,&0

,0

,&0

3alu at*piry

3alu o$

stoc at

*piry


28/63

17-2(

PROTECTI4E P,T STRATE&Y:PROFITS;

)uy a put with *rcis pric o$ ,&0

$or ,10

)uy th stoc at ,40

,40

rotcti! ut

stratgy has

downsid protction

and upsid potntial

,40

,0

-,40

,&0

3alu at*piry

3alu o$

stoc at

*piry

-,10


29/63

17-2

CO4ERED CALL STRATE&Y

ll a call with *rcis prico$ ,&0 $or ,10

)uy th stoc at ,40

,40

Co!rd Call stratgy

,0

-,40

,&0

3alu at

*piry

3alu o$ stoc at *piry

-,%0

,10


30/63

17-%0

LON& STRADDLE

30 40 60 70

30

40

Stock price ($)

Optionpayoffs

($)

)uy a put with *rcis

pric o$ ,&0 $or ,10

)uy a call with *rcis

pric o$ ,&0 $or ,10

A


31/63

17-%1

S+ORT STRADDLE

30

30 40 60 70

40

Stock price ($)

Opt

ionpayoffs($)

,&0

6his hort traddl only loss /ony i$ th stoc

pric /o!s ,20 away $ro/ ,&0.

ll a put with *rcis pric o$

,&0 $or ,10

ll a call with an

*rcis pric o$ ,&0 $or ,10

20


32/63

17-%2

P,T(CALL PARITY PGJ SG CGJ E:1J R;T

#ond

25

25

Stock price ($)

Option

payoffs($)

Considr th payo$$s $ro/ holding a port$olio

consisting o$ a call with a stri pric o$ ,2& and a

#ond with a $utur !alu o$ ,2&.

Call

ort$olio payo$$ort$olio !alu today + C05

>15R?T

E


33/63

17-%%

P,T(CALL PARITY

25

25

Stock price ($)

Optionpayoffs($)

Considr th payo$$s $ro/ holding a port$olio consisting

o$ a shar o$ stoc and a put with a ,2& stri.

ort$olio !alu today +P05 S0

ort$olio payo$$


34/63

17-%4

P,T(CALL PARITY

inc ths port$olios ha! idntical payo$$s; thy /ust ha!

th sa/ !alu today@ hnc

ut-Call arity@ C05E>15R?T+P05 S0

2&

2&

toc pric >,?

0ptionpay

o$$s>,?

2&

2&

toc pric >,?

0ptionpay

o$$s>,? ort$olio !alu today

+P05 S0

ort$olio !alu today

>15R?T

E

+ C05


35/63

17-%&

17-7 4AL,IN& OPTIONS

The la!t !e#tion#on#erne" it!elf

=ith the al'eof an option ate


36/63

17-%'

A>ERICAN CALL

C0/ust $all within /a* >S0:E,0? B C0 B S0.

25

Option

payoffs($) Call

S6

loss

E

ro$it

ST

pculati! !alu

ntrinsic !alu

Mart 3alu

n-th-/onyut-o$-th-/ony


37/63

17-%7

OPTION 4AL,E DETER>INANTS

Call ut1. toc pric 5 :

2. E*rcis pric : 5

%. ntrst rat 5 :

4. 3olatility in th stoc pric 5 5

&. E*piration dat 5 5

6h !alu o$ a call option C0/ust $all within/a* >S0:E,0? B C0 B S0.

6h prcis position will dpnd on ths $actors.


38/63

17-%(

17-5 AN OPTION PRICIN& FOR>,LA

@e =ill !tart=ith a $inomial

option pri#ingform'la to$'il" o'r

int'ition-

Then =e =illgra"'ate to

the normalappro


39/63

17-%

)INO>IAL OPTION PRICIN& >ODEL

S'ppo!e a !to#* i! =orth . to"a an" in one perio" =ill

either $e =orth 1M more or 1M le!!- SG . to"a an" inone ear S1i! either .5-7 or .1-.- The ri!*(free rate i!M- @hat i! the al'e of an at(the(mone #all option

,2&

,21.2& + ,2&>1 :.1&?

,2(.7& + ,2&>1.1&?S1S0


40/63

17-40


1- A #all option on thi! !to#* =ith e


41/63

17-41


)orro= the pre!ent al'e of .1-. to"a an" $' 1!hare-

The net paoff for thi! leere" e9'it portfolio in oneperio" i! either 7-G or G-

The leere" e9'it portfolio ha! t=i#e the option!paoff8 !o the portfolio i! =orth t=i#e the #all optional'e-

,2&

,21.2&

,2(.7&

S1S0

d#t

:,21.2&

port$olio

,7.&0

,0

> : ? +

+

+

C1

,%.7&

,0: ,21.2&


42/63

17-42


The al'e to"a of the leere"e9'it portfolio i! to"a! al'eof one !hare le!! the pre!ental'e of a .1-. "e$t

,2&

,21.2&

,2(.7&

S1

S0

d#t:,21.2&

port$olio,7.&0

,0

> : ? +

+

+

C1

,%.7&

,0: ,21.2&


43/63

17-4%


@e #an al'e the #all option

to"a a! half of the al'e ofthe leere" e9'it portfolio

,2&

,21.2&

,2(.7&

S1S0 d#t

:,21.2&

port$olio

,7.&0

,0

> : ? +

+

+

C1,%.7&

,0: ,21.2&


44/63

17-44


If the intere!t rate i! M8 the #all i! =orth.,2&

,21.2&

,2(.7&S1S0 d#t

:,21.2&port$olio,7.&0

,0

> : ? ++

+

C1,%.7&

,0: ,21.2&

,2.%(

C0


45/63

17-4&


the repli#ating portfolio int'ition-

Many dri!ati! scuritis can # !alud #y

!aluing port$olios o$ pri/iti! scuritis

whn thos port$olios ha! th sa/ payo$$s

as th dri!ati! scuritis.

6h /ost i/portant lsson >so $ar? $ro/ th#ino/ial option pricing /odl is@


46/63

17-4'

DELTA

Thi! pra#ti#e of the #on!tr'#tion of ari!*le!! he"ge i! #alle" delta hedging-

The "elta of a #all option i! po!itie- Re#all from the e


47/63

17-47

DELTA

Determining the amo'nt of$orro=ing

4al'e of a #all Sto#* pri#e Delta

Amo'nt $orro=e"

.


48/63

17-4(

T+E RISK(NE,TRAL APPROAC+

@e #o'l" al'e the option8 V:G;8 a! the al'e of therepli#ating portfolio- An e9'ialent metho" i! risk-neutral valuation:

S>0?; V>0?

S>U?; V>U?

S>D?; V>D?

q

1- q


49/63

17-4


S:G; i! the al'e of the 'n"erling a!!et to"a-

S>0?; V>0?

S>U?; V>U?

S>D?; V>D?

S>U? and S>D? ar th !alus o$ th asst in th n*t priod$ollowing an up /o! and a down /o!; rspcti!ly.

V>U? and V>D? ar th !alus o$ th option in th n*t priod$ollowing an up /o! and a down /o!; rspcti!ly.

q

1- q

qis th ris-nutral

pro#a#ility o$ an

upF /o!.


50/63

17-&0


The *e to fin"ing qi! to note that it i! alrea" impo'n"e"into an o$!era$le !e#'rit pri#e the al'e of S:G;

S>0?; V>0?

S>U?; V>U?

S>D?; V>D?

q

1- q

A /inor #it o$ alg#ra yilds@

EA>PLE OF RISK NE,TRAL


51/63

17-&1

EA>PLE OF RISK(NE,TRAL4AL,ATION

S'ppo!e a !to#* i! =orth . to"a an" in one perio"=ill either $e =orth 1M more or 1M le!!- The ri!*(free rate i! M- @hat i! the al'e of an at(the(mone#all optionThe $inomial tree =o'l" loo* li*e thi!

$21.25;C>D?

q

1- q

$25;C>0?

$28.75;C>U?

EA>PLE OF RISK NE,TRAL


52/63

17-&2


The ne


53/63

17-&%


After that8 fin" the al'e of the #all in the 'p!tate an" "o=n !tate-

$21.25; $0

2/3

1/3

$25;C>0?

$28.75; $3.75

EA>PLE OF RISK(NE,TRAL


54/63

17-&4


Finall8 fin" the al'e of the #all at time G

$21.25; ,0

2/3

1/3

$25;C>0?

$28.75;,%.7&

$25;$2.38

RISK NE,TRAL 4AL,ATION AND


55/63

17-&&

RISK(NE,TRAL 4AL,ATION ANDT+E REPLICATIN& PORTFOLIO

Thi! ri!*(ne'tral re!'lt i! #on!i!tent =ithal'ing the #all '!ing a repli#ating portfolio-.


56/63

17-&'

T+E )LACK(SC+OLES >ODEL

Ihr

C0+ th !alu o$ a Europan option at ti/ t+ 0

R+ th ris-$r intrst rat.

">d? + ro#a#ility that astandardiJd; nor/ally

distri#utd; rando/

!aria#l will # lss than

or Kual to d.

6h )lac-chols Modl allows us to !alu options in th

ral world Lust as w ha! don in th 2-stat world.


57/63

17-&7


Fin" the al'e of a !i


58/63

17-&(


Let! tr o'r han" at '!ing the mo"el- If o' hae a#al#'lator han"8 follo= along-

6hn;

irst calculat d1

and d2


59/63

17-&


">d1? + ">0.&2(1&? + 0.701%

">d2? + ">0.%1'02? + 0.'2401.

17 6 STOCKS AND )ONDS AS


60/63

17-'0

17-6 STOCKS AND )ONDS ASOPTIONS

Leere" e9'it i! a #all option- The 'n"erling a!!et #ompri!e! the a!!et! of the

firm- The !tri*e pri#e i! the paoff of the $on"-

If at the mat'rit of their "e$t8 the a!!et! ofthe firm are greater in al'e than the "e$t8 the!harehol"er! hae an in(the(mone #all- The=ill pa the $on"hol"er! an" #all inB the a!!et!of the firm-

If at the mat'rit of the "e$t the !harehol"er!hae an o't(of(the(mone #all8 the =ill notpa the $on"hol"er! :i.e.,the !harehol"er! =ill"e#lare $an*r'pt#; an" let the #all e


61/63

17-'1

STOCKS AND )ONDS AS OPTIONS

Leere" e9'it i! a p't option- The 'n"erling a!!et #ompri!e! the a!!et! of thefirm-

The !tri*e pri#e i! the paoff of the $on"-

If at the mat'rit of their "e$t8 the a!!et!

of the firm are le!! in al'e than the "e$t8!harehol"er! hae an in(the(mone p't-

The =ill p't the firm to the $on"hol"er!-

If at the mat'rit of the "e$t the

!harehol"er! hae an o't(of(the(monep't8 the =ill not e


62/63

17-'2

STOCKS AND )ONDS AS OPTIONS

It all #ome! "o=n to p't(#all parit-

3alu o$ a

call on th$ir/

3alu o$ a

put on th$ir/

3alu o$ a

ris-$r#ond

3alu o$

th $ir/+ 5 :

tocholdrNsposition in tr/s

o$ call options

tocholdrNsposition in tr/s

o$ put options

C0 + S0 5 0: >15R?TE


63/63

2,ICK 2,I

@hat i! the "ifferen#e $et=een #allan" p't option!

@hat are the ma%or "eterminant! of

option pri#e! @hat i! p't(#all parit @hat =o'l"

happen if it "oe!nt hol" @hat i! the )la#*(S#hole! option

pri#ing mo"el

Date post:	06-Jan-2016
Category:	Documents
Upload:	dia
View:	31 times
Download:	0 times

Corporate Finance Ch. 17

Documents