Chapter 19 - Options and contingent claims. This chapter include objectives: Understand the major types and characteristics of options and distinguish between options and futures; identify and explain the factors that affect option prices; understand and apply basic option pricing theorems, including put–call parity, | Chapter 19 Options and Contingent Claims 2 2 2 2 2 2 2 2 Learning Objectives Understand the major types and characteristics of options and distinguish between options and futures. Identify and explain the factors that affect option prices. Understand and apply basic option pricing theorems, including put–call parity. 2 2 2 2 2 2 2 2 Learning Objectives (cont.) Understand the binomial model and Black–Scholes model of option pricing and calculate option prices using these models. Explain the characteristics and uses of foreign currency options and options on futures. Define a contingent claims and explain the option-like features of several contingent claims. 3 3 3 3 Options and Option Markets An ‘option’ is the right to force a transaction to occur at some future time on terms and conditions decided now. It is a contract which gives the purchaser the right, but not the obligation, to assume a long (buy) or short (sell) position in the relevant underlying financial instrument or . | Chapter 19 Options and Contingent Claims 2 2 2 2 2 2 2 2 Learning Objectives Understand the major types and characteristics of options and distinguish between options and futures. Identify and explain the factors that affect option prices. Understand and apply basic option pricing theorems, including put–call parity. 2 2 2 2 2 2 2 2 Learning Objectives (cont.) Understand the binomial model and Black–Scholes model of option pricing and calculate option prices using these models. Explain the characteristics and uses of foreign currency options and options on futures. Define a contingent claims and explain the option-like features of several contingent claims. 3 3 3 3 Options and Option Markets An ‘option’ is the right to force a transaction to occur at some future time on terms and conditions decided now. It is a contract which gives the purchaser the right, but not the obligation, to assume a long (buy) or short (sell) position in the relevant underlying financial instrument or future at a predetermined exercise (strike) price, at a time in the future. 4 4 4 4 4 3 31 31 Options and Option Markets (cont.) In return for this right the purchaser pays a the option price to the seller (‘writer’) of the option. Unlike FRAs and futures contracts, options allow the benefits of favourable price movements and provide protection against unfavourable price movements. 6 5 5 5 5 4 32 32 Exchange Traded Options (ETO) An option that is traded on an exchange in a standardised denomination and follows fixed maturities, with predetermined standard terms. These options do not need to be held to expiry, they can be easily sold on the appropriate derivatives exchange before expiry. 7 6 6 6 6 5 33 33 Option Terminology Call option Purchaser has the right but not the obligation to buy an asset at the specified exercise price. Purchaser’s risk is limited to the price paid. Writer’s profit is limited to the price received and has unlimited upside risk should prices rise. 8 7 7 7 8 7
