Chapter 20, options and corporate finance. After studying this chapter you will be able to: Give the definitions for a put option and a call option, be familiar with common stock option quotations, illustrate the payoffs from a put and call option at maturity, explain how to determine the upper and lower bounds on a call option's value, compute the value of a call option based on the assumption that it is certain that the option will finish in the money,. | Fundamentals of Corporate Finance, 3/e Robert Parrino, . David S. Kidwell, . Thomas W. Bates, . 1 Copyright© 2015 John Wiley & Sons, Inc. Chapter 20: Options and Corporate Finance Learning Objectives Define a call option and a put option, and describe the payoff function for each of these options List and describe the variables that affect the value of an option; calculate the value of a call option and of a put option Name some of the real options that occur in business and explain why traditional NPV analysis does not accurately incorporate their values Copyright© 2015 John Wiley & Sons, Inc. 3 Learning Objectives Describe how the agency costs of debt and equity are related to options Explain how options can be used to manage a firm’s exposure to risk Copyright© 2015 John Wiley & Sons, Inc. 4 Financial Options A financial option is a derivative security in that its value is derived from the value of another asset The owner of a financial option has the right, but not the obligation, to buy or sell an asset on or before a specified date for a specified price The asset that the owner has a right to buy or sell is known as the underlying asset The last date on which an option can be exercised is called the exercise date or expiration date, and the price at which the option holder can buy or sell the asset is called the exercise price or strike price Call Options A call option gives the owner the right to buy, or “call,” the underlying asset Once the asset price goes above the exercise price, the value of the call option at exercise increases dollar for dollar with the price of the underlying asset The buyer pays the seller a fee to purchase the option This fee, which is known as the call premium, makes the total return to the seller positive when the price of the underlying asset is near or below the exercise price Put Options The owner of a put option has the right to sell the underlying asset at a pre-specified price The payoff function for the owner | Fundamentals of Corporate Finance, 3/e Robert Parrino, . David S. Kidwell, . Thomas W. Bates, . 1 Copyright© 2015 John Wiley & Sons, Inc. Chapter 20: Options and Corporate Finance Learning Objectives Define a call option and a put option, and describe the payoff function for each of these options List and describe the variables that affect the value of an option; calculate the value of a call option and of a put option Name some of the real options that occur in business and explain why traditional NPV analysis does not accurately incorporate their values Copyright© 2015 John Wiley & Sons, Inc. 3 Learning Objectives Describe how the agency costs of debt and equity are related to options Explain how options can be used to manage a firm’s exposure to risk Copyright© 2015 John Wiley & Sons, Inc. 4 Financial Options A financial option is a derivative security in that its value is derived from the value of another asset The owner of a financial option has the right, but not .
