understandig the working process in finance dacision making

May 28th, 2015
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Abilene Christian University
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a. An option is a contract giving its owner the right to buy or sell an asset at a fixed price on or before a given date. b. Exercise is the act of buying or selling the underlying asset under the terms of the option contract. c. The strike price is the fixed price in the option contract at which the holder can buy or sell the underlying asset. The strike price is also called the exercise price. d. The expiration date is the maturity date of the option. It is the last date on which an American option can be exercised and the only date on which a European option can be exercised. e. A call option gives the owner the right to buy an asset at a fixed price during a particular time period. f. A put option gives the owner the right to sell an asset at a fixed price during a particular time period.

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Chapter 22: Options and Corporate Finance: Basic Concepts22.1a.b.c.d.e.f.An option is a contract giving its owner the right to buy or sell an asset at a fixed price on or beforea given date.Exercise is the act of buying or selling the underlying asset under the terms of the option contract.The strike price is the fixed price in the option contract at which the holder can buy or sell theunderlying asset. The strike price is also called the exercise price.The expiration date is the maturity date of the option. It is the last date on which an Americanoption can be exercised and the only date on which a European option can be exercised.A call option gives the owner the right to buy an asset at a fixed price during a particular timeperiod.A put option gives the owner the right to sell an asset at a fixed price during a particular timeperiod.22.2An American option can be exercised on any date up to and including the expiration date. A Europeanoption can only be exercised on the expiration date. Since an American option gives its owner the rightto exercise on any date up to and including the expiration date, it must be worth at least as much as aEuropean option, if not more.22.3The put is not correctly priced. An American put option must always be worth more than the value ofimmediate exercise. The value of immediate exercise for a put option equals the strike price minus thecurrent stock price. In this problem, the value of immediate exercise is $5 (

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