Introduction to call_and_put_options

Jun 28th, 2015
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Valuation based on PV of probable future payoffs. = PV of probability weighted average of expected values.

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FinancialManagementOption ValuationChandan AgarwalSt. Xaviers College, KolkataDefining an OPTION. . . .A derivative financial instrumentCurrent Contract to transact at a future dateTransaction to be at a reference rate (Strike Price)PartyBuyerRight totransactCounterPartySellerObligationto transactDefining PREMIUM. . . .Price paid by buyer to buy the contractMaximum expected profit for the sellerBuyerSellerRight totransactObligationto transactWill exerciseright onlywhen profitable!Will have to bearthe loss if buyerexercises!Defining the Types of options. . . .Based on date of exerciseEuropeanCan be exercisedonly at expiration!AmericanCan be exercisedprior to expiration!Defining the Types of options. . . .Based on trade marketsOver the counterExchange tradedTailorableStandardizedFaces counter partydefault risk!No counter partydefault risk!Interest rate options,currency options.Stock options,bond options,index options.Calls and the Puts contd. . . .CALL OPTIONC+C-Right tobuy at a specifiedprice.Obligation tosell at a specifiedprice.Afraid of pricerising!Afraid of pricefalling!Calls and the Puts contd. . . .PUT OPTIONP+P-Right tosell at a specifiedprice.Obligation tobuy at a specifiedprice.Afraid of pricefalling!Afraid of pricerising!A Buyer of a call option C+B Seller of a call option CStrike price (30 days) Rs. 30; Premium

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