3: Derivative Valuations (Disc time) Flashcards
1
Q
What is a call option
A
Holder can buy asset for $K
2
Q
Holder of a put option can…
A
Sell asset for $K if they want.
3
Q
Payoff fcn for euro call option
A
Max{St-K,0}
4
Q
We will exercise a call if
A
St > K
we can buy for K and immediately sell for more
5
Q
We exercise a put if
A
St < K
We can sell it for K (more than market value)
6
Q
In the money means
A
profit
7
Q
at the money means
A
St = K
8
Q
Out of the money means
A
won’t exersise the option
9
Q
Payoff fnc for euro put option
A
Max { K-St , 0}
10
Q
How is American call option different
A
holder can exercise option at any time before T
