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