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Flashcards in 01 Week Deck (29):
1

What is an option

Right to buy/sell an asset in the future at some predetermined price

2

What is a strike or exercise price X?

Price at which underlying can be bought or sold

3

What is a maturity or expiration date?

Date the option matures

4

What is an American option

Exercise possible any time until expiration

5

What is an European option

Exercise possible at expiration only

6

What is a Call option?

Call options give you the right to buy

7

What is a Put option?

Put options give you the right to sell

8

What is the exercise gain of a call?

max[0 , S-X]

9

What is the exercise gain of a put?

max[0, X-S]

10

Profit of the buyer (long) is equal to ...

... the loss of the seller (short)

11

What is the Put-call-parity

S-B = C-P

12

What are the assumptions of the One-step Binomial Model

Assumptions:
- Stock price S follows multiplicative binomial process
- Trading occurs only at discrete times

13

Which relationships must hold in a market equilibrium?

1+r_f > d
u > 1+ r_f

r_f: risk-free rate
d: multiplicative downward movement in the stock price
u: multiplicative upward movement in the stock price

14

How can p in the Binomial Model be interpreted

p can be interpreted as a probability for the upward movement in a world with risk-neutral investors.

p is called the risk-neutral probability.

In real world q lager then p.

15

How is p called?

p is called the risk-neutral probability

16

For what option is the value of an American option equal to the value of a European option.

For a non-dividend paying stock the Value of an American call is equal to the value of an European call.
his is bc it is never optimal for exercise this call pre-maturely

17

Assumptions of the Black-Scholes Option Pricing Formula

- Stock price moves randomly in continuous time
- No dividends
- No market friction
(European Call)

18

Define no market friction

- no arbitrage opportunities
- no transaction costs
- no interest rates
- no short-sale restrictions

19

What is the Problem with the NPV-Methode

the NPV-Methode is not suitable for flexible, multi-period decision making under uncertainty

20

What is an Expansion option?

Growth option on an underlying asset that assumes precommitment of a series of investments to growing demand over time (American call)

21

What is a Contraction option?

Option to receive cash for partially giving up the use of asset (American put)

22

What is an Abandonnment option?

Right to sell an asset for given price, which can change through time rather than continuing to hold it (American put)

23

What is an Extentsion option?

Allows manager to pay a cost for the ability to extend the life of a project (European call with cost of extension as exercise price) (European Call)

24

What is a Defferal option?

Right to defer the start of a project (American call)

25

What is a Switching option?

Right to turn a project on and off

26

What is a Compound option?

Options on options

27

How is calculation an expected NVP called?

Decision-Tree-Analysis (DTA) -> wrong result -> User Real-Optionpricing-Analysis (ROA)

28

What is the Problem with the DTA?

We do not know the appropriate WACC to work with

29

Three Key Assumptions for Pricing Real Options

1. Present value of project without flexibility can be used as twin security
2. Real option pricing obeys the pronciple of no-arbitrage
3. Properly anticipated prices fluctuate randomly