01 Week Flashcards
What is an option
Right to buy/sell an asset in the future at some predetermined price
What is a strike or exercise price X?
Price at which underlying can be bought or sold
What is a maturity or expiration date?
Date the option matures
What is an American option
Exercise possible any time until expiration
What is an European option
Exercise possible at expiration only
What is a Call option?
Call options give you the right to buy
What is a Put option?
Put options give you the right to sell
What is the exercise gain of a call?
max[0 , S-X]
What is the exercise gain of a put?
max[0, X-S]
Profit of the buyer (long) is equal to …
… the loss of the seller (short)
What is the Put-call-parity
S-B = C-P
What are the assumptions of the One-step Binomial Model
Assumptions:
- Stock price S follows multiplicative binomial process
- Trading occurs only at discrete times
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
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.
How is p called?
p is called the risk-neutral probability
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
Assumptions of the Black-Scholes Option Pricing Formula
- Stock price moves randomly in continuous time
- No dividends
- No market friction
(European Call)
Define no market friction
- no arbitrage opportunities
- no transaction costs
- no interest rates
- no short-sale restrictions
What is the Problem with the NPV-Methode
the NPV-Methode is not suitable for flexible, multi-period decision making under uncertainty
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)
What is a Contraction option?
Option to receive cash for partially giving up the use of asset (American put)
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)
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)
What is a Defferal option?
Right to defer the start of a project (American call)
