Derivatives Options.ppt

Derivatives Options Historical Topics Internal to the Corp 1 - Capital Budgeting Investment 2 - Capital Structure Financing Today We are leaving Internal Corporate Finance We are going to Wall St “Capital Markets” Options - financial and corporate Options are a type of derivative Options Terminology Derivatives - Any financial instrument that is derived from another. e.g.. options, warrants, futures, swaps, etc. Option - Gives the holder the right to buy or sell a security at a specified price during a specified period of time. Call Option - The right to buy a security at a specified price within a specified time. Put Option - The right to sell a security at a specified price within a specified time. Option Premium - The price paid for the option, above the price of the underlying security. Intrinsic Value - Diff between the strike price and the stock price Time Premium - Value of option above the intrinsic value Options Terminology Exercise Price - Striking Price The price at which you buy or sell the security. Expiration Date - The last date on which the option can be exercised. American Option - Can be exercised at any time prior to and including the expiration date. European Option - Can be exercised only on the expiration date. All options “usually” act like European options because you make more money if you sell the option before expiration vs. exercising it . 3 vs. 70-68 2 Option Obligations Option Value The value of an option at expiration is a function of the stock price and the exercise price. 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 $85 Options CBOE Success 1 - Creation of a central options market place. 2 - Creation of Clearing Corp - the guarantor of all trades. 3 - Standardized expiration dates - 3rd Friday 4 - Created a secondary market Options Components of the Option Price 1 - Underlying stock price 2 - Striking