Managing Crude Oil Using Derivatives

Managing Crude Oil Using Derivatives
MANAGING CRUDE OIL USING DERIVATIVES
The present price markers for crude oil are WTI, Brent and Dubai/Oman. The crude oil derivatives contracts are traded on the New York Mercantile
Exchange (NYMEX). The exchange acts as a regulatory body and as a financial trading forum for all the parties interested in buying the options.
Members of the exchange carry out the trades themselves, or they act on behalf of the firms they represent through an open outcry auction held in the
trading room or the floor. The procedure begins when a buyer calls an authorized commodity broker with an order to buy or sell futures or options
contract. This order is sent to the firm's agent who is on the trading floor. The prospects of more profits increases for the... Show more content on
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If the price of oil is tripled in a year then the company is able to purchase oil at the last years "locked in" price, which is lower than the current price,
which in turn helps the company to save a lot of money (Grabianowski, 2009). But, if the price of oil falls then the company ends up paying more and
loses money.
There are different types of financial instruments available for companies and investors to hedge against crude oil price volatility. These instruments
can be traded financially without the tangible physical delivery of crude oil and different instruments have different time periods. Some of the hedging
tools are Options, Futures and Swaps. But for this paper we will only focus on option contracts for management of risk in crude oil trading.
OPTIONS
The modern–day financial options market came into existence in 1973. It was known as the Chicago Board Options Exchange. During the same
year, Fisher Black and Myron Scholes invented a formula to calculate the price of an option using specific variables. This formula was later called the
Black Scholes Pricing Model and it had a huge impact on investors as they became confident about the idea of trading options. As of today there are
thousands of option instruments (stocks, bonds and currency) listed in the market and millions of them are traded every day.
Options offer extra flexibility to buyers for managing currency or price risk as they work like an insurance policy.Call option and Put option

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Test Bank
CHAPTER 1
Introduction
Practice Questions
Problem 1.8.
Suppose you own 5,000 shares that are worth $25 each. How can put options be used to provide you with insurance against a decline in the value of
your holding over the next four months?
You should buy 50 put option contracts (each on 100 shares) with a strike price of $25 and an expiration date in four months. If at the end of four
months the stock price proves to be less than $25, you can exercise the options and sell the shares for $25 each.
Problem 1.9.
A stock when it is first issued provides funds for a company. Is the same true of an exchange–traded stock option? Discuss.
An exchange–traded stock option provides no funds for the company. It is a security ... Show more content on Helpwriting.net ...
The profit as a function of the stock price is shown in Figure S1.1.
[pic]
Figure S1.1 Profit from long position in Problem 1.13
Problem 1.14.
Suppose that a June put option on a stock with a strike price of $60 costs $4 and is held until June. Under what circumstances will the holder of the
option make a gain? Under what circumstances will the option be exercised? Draw a diagram showing how the profit on a short position in the option
depends on the stock price at the maturity of the option.

The seller of the option will lose if the price of the stock is below $56.00 in June. (This ignores the time value of money.) The option will be exercised
if the price of the stock is below $60.00 in June. The profit as a function of the stock price is shown in Figure S1.2.
[pic]
Figure S1.2 Profit from short position In Problem 1.1
Problem 1.15.
It is May and a trader writes a September call option with a strike price of $20. The stock price is $18, and the option price is $2. Describe the investor's
cash flows if the option is held until September and the stock price is $25 at this time.
The trader has an inflow of $2 in May and an outflow of $5 in September. The $2 is the cash received from the sale of the option. The $5 is the
result of the option being exercised. The investor has to buy the stock for $25 in September and sell it to the purchaser of the option for $20.
Problem 1.16.
An investor writes a December put

Investment Analysis of Stock Offerings of British Petroleum
From: Investment analysis team To: Potential Investor
Subject: Investment Analysis of Stock Offerings of British Petroleum
BP's stock offering, which is part of the government's decentralization plan, has come at a time when markets are still feeling the aftermath of what
has been the biggest one day drop in history. This has caused detrimental effects on the market which is felt by most, if not all companies. What could
have been an attractive offer has turned sour as BP's stock price dipped dramatically.
Upon analysing this fund–raising issuance along with the current market environment, we have concluded that this offering is not as valuable despite
the addition of the repurchase plan (put option) after the first payment. ... Show more content on Helpwriting.net ...
Instead of having the customers pay 1.2 on the first date and 1.05 each on the second and third payment dates, a payment scheme of 1 on October
1987 and 1.15 on August 1988 and April 1989 will make the BP stock offering a better one. Values higher than the payment amounts are what we
need since it will allow investors to have payoffs regardless of the movements of the stock price. Compared with the value in Annex 4, the payoff in
this recommendation is 0.03648, compared to simply changing the put price, which yields a payoff of 0.00003. If this payment scheme is applied, the
breakeven price for the option strike price significantly decreases to around 0.6338.
Combining these two changes together, the investment becomes more valuable. Our computations show a payoff of 0.1459 when the strike price is
0.85 and changing the payment scheme to 1.0 on October 1987 and 1.15 each on August 1988 and April 1989.
To sum everything up, this stock offering is not a good investment on its current terms. The repurchase plan may have given the issuance a little boost
but it really hasn't given enough to make BP's stock offering beneficial to the investor. However, should management decide to change the factors such
as the stock price

Option and Dividend Yield
Chapter 15
Quiz
15.1) A portfolio is currently worth $10 million and has a beta of 1.0. An index is currently standing at 800. Explain how a put option with a strike
price of 700 can be used to provide portfolio insurance.
Index goes down to 700
10*(800/700)= 8.75 million
Buying put options= 10,000,000/800= 12,500
If you buy the options at 800, the value will be 12,500 times the index with a strike price of 700 therefore providing protection against a drop in the
value of the portfolio below $8.75 million. Each contract is on 100 times the index, a total of 125 contracts would be required.
15.2) "Once we know how to value options on a stock paying a dividend yield, we know how to value options on stock indices and currencies." ... Show
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The risk free rates of interest in Canada and the United States are 4% and 5% per annum, respectively,. Calculate the value of a European call option to
buy one Canadian dollar for US $.85 in nine months. Use put–call parity to calculate the price of a European put option to sell one Canadian dollar for
US d$.85 in nine months. What is the price of a call option to buy US $ .85 with one Canadian dollar in nine months?
S_0= .85
K=.85
r=.05 r_f= .04 Пѓ=.08 T= .75 d_1= ln(.85/.85)+(.05–.04+.0064/2)*75 / .04в€
љ.75= 0.285788 d_2=d_1–.04в€
љ.75= 0.251147
N(d1)= 0.61248
N(d2)= 0.59915 Value of the call c
c=.85e^–.04*.75 * 0.61248 – .85e^–.05*.75 * 0.5789 = .031267
The value of the call is 3.12 cents
Put call parity p+S_0e^ –rf*T = c+Ke^–r*T
p=.031267 + .85e^–.05*.75 – .85e^–.04*.75 = .08826

The put option on the Canadian Dollar and its price is $.08826

Trading Stock Options Online Essay
The popularity of online options trading has exploded in recent years. The Internet has fueled a booming business of small investors throwing money
at the derivatives market. The upside to an expanding array of financial products is a greater potential for profit to be made by investors skilled in
daily trading; the downside is increased risk and a more complex trading environment. For the amateur investor who is ready to learn how to trade stock
options the derivatives market can be enticing, but also frightening. This article will outline some of the advantages and disadvantages of the stock
options market for the average investor.
5 Reasons to Trade Options
Trading stock options is not for the faint of heart. Derivatives trading ... Show more content on Helpwriting.net ...
Ignorance when trading stock options can be costly.
Even if you choose not to risk money at online options trading you should still be aware of how stock options affect your portfolio and daily trading
habits. You've heard it before and it bears repeating here: knowledge is power. The more you know about Wall Street, the better you can adjust your
trading moves to succeed in the equities market.
Online Trading Options
Several brokerage firms will help you learn how to trade stock options online. Ameritrade has an online division that offers low commissions. The
popular and well known eTrade was formed to cut out the middle–man (brokers) and reduce commission fees. It also offers very reasonable
commission rates. More and more brick–and–mortar brokerage houses are setting up web divisions to compete for your business online. Trading stock
options online has never been easier.
Option Trading Guide
Trading stock options may seem convoluted compared to trading equity shares, but knowledge is power when evaluating any financial product; stock
options are no different. This simple guide is meant to explain some basic terms you will encounter in the realm of options trading.

As you can see, several products exist for those who are interested in trading stock and stock options.
Equities
Stocks. Shares of a company or companies.
Derivatives
A financial product derived from equities. Stock options are a kind of derivative.
Hedging
Hedging is

Comparing Debt Financing and Equity Financing Essay
There are two basic ways of financing for a business: Debt financing and equity financing. Debt financing is defined as 'borrowing money that is to
be repaid over a period of time, usually with interest" (Financing Basics, 1). The lender does not gain any ownership in the business that is borrowing.
Equity financing is described as "an exchange of money for a share of business ownership" (Financing Basics, 1). This form of financing allows the
business to obtain funds without having to repay a specific amount of money at any particular time. There are also a few different instruments that
could be defined as either debt or equity. One such instrument is stock options that an employee can exercise after so many years with the ... Show more
content on Helpwriting.net ...
Now I will discuss the pros and cons of the alternative decision, which is a combination of the debt and equity methods. A positive of this method is
that the instrument is split between debt and equity. The company could just split it up 50/50 between the two methods. Also if they had too much
debt, they could account for the instrument with 20% as debt and 80% as equity. This would make it look as if they do not have too much debt or too
much equity. This method would be an advantage, if the company were looking to get more financing in the future.
A negative aspect of this method is how the instrument is split between debt and equity. An example would be if the company split an instrument 50/50
between the two methods. This may seem fair when first accounting for it, but what if the split did not represent the actual split of the instrument. Let's
say that it turns out that 90% of the instrument ends up being equity, and 10% ends up debt. The books would be off by quite a bit, and creditors my
not be happy with the company when they learn of this.
Now that I have discussed pros and cons of each method, I will now explain the instrument that I will be using as an example. I will be using stock
options as the instrument. Stock options are offered by many businesses to employees that stay with the company for a specified length of time. It is
offered by the company as an

Sally Jameson: Valuing Stock Options in a Compensation...
Sally Jameson: Valuing Stock Options in a Compensation Package (Abridged)
Sally Jameson, a second–year MBA student at Harvard Business School, was thrilled but confused. It was late May 1992, graduation was
approaching, and she had finally landed the job of her choice. She had just finished an early morning telephone conversation with Bob Marks, the
MBA recruiting coordinator at Telstar Communications, a large, publicly held multinational company. Mr. Mark had offered Ms. Jameson a unique
position in operations at Telstar, and from the description, it sounded exactly like the job that she wanted Since her first interview with Telstar, she had
been very impressed with the company and its people while Ms. Jameson was certain that she ... Show more content on Helpwriting.net ...
They recommended that we extend eligibility for stock options to all employees as part of our new inventive–based compensation plans. Thus, the two
MBAs that we hope to hire this year will be the first employees who will be offered stock options. Given that this is an experiment, we decided to
give MBAs a choice between cash or options. Jameson: "How much are these options worth?"
Marks: "To tell you the truth, I'm not really sure. All I know are the details: each of the 3,000 options you'll be granted allows you to buy one share
of Telstar stock at $3500 per share at the time of your fifth anniversary with the furn. Yesterday, our stock, which pays no dividend and is not expected
to pay one in the foreseeable future, closed at $1875. should you leave any point before you fifth year, you lose the options. You can't take them with
you.
Casewriter's note: stock options of this sort would more typically have been written with a strike price equal to or just slightly above the current price.
Professor peter Tufano and Research Associate Michael Lewittes prepared this case. HBS cased are developed solely as the basis for class discussion.
Certain details have been disguised Cased are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective
management.
Copyright 1993 President and Fellows of Harvard College To order copies or request permission to produce material, call 1–800–545–7685, write

Taking a Look at Exotic Options
Introduction
Ideally we would want to find closed form solutions for all exotic options. As the payoff structures of the exotic options become more complicated, so
does the difficulty in finding closed form solutions. In most cases closed–form solutions do not exist, eg. American barrier options and these must be
valued by using numerical methods.
The lattice methods, i.e. binomial and trinomial trees, assume that the underlying stochastic process is discrete, i.e. the underlying asset can change to
a finite number of values (each associated with a certain probability) with a small advancement in time.
Pricing barrier options using lattice techniques can be quite delicate. While the use of a large number of time steps may produce accurate solutions for
standard options, the use of the same number of time steps in valuing barrier options will often produce erroneous option values. The source of the
problem arises from the location of barrier with respect to adjacent layers of nodes in the lattice. If the barrier falls between layers of the lattice, the
errors may be quite significant.
Ritchken [1995] provides a highly efficient algorithm which produces a lattice where the nodes hit the barrier.
Options
A plain normal option is called a Vanilla Option. An option is a financial contract which gives its owner a right, but not an obligation to sell or
purchase an asset at a later stage during the lifetime of the asset. The asset mentioned herein can be anything from stocks,

Gaap Case 15-1
Chapter 15
Debate 15–1 pg. 548
Team 1
Argue for current GAAP treatment for the issuance and subsequent reporting of options and warrants.
Stock options and warrants give the holder the right to purchase a share of stock at a predetermined price within a given time period. According to
Richard G Schroeder in the textbook Financial Accounting Theory and Analysis: Text and Cases, under current GAAP the cash inflow received from
these securities needs to be reported as equity. The value reported in subsequent periods is historical and does not change in response to changes in the
market value of these securities.
SFAC No. 6 defines equity as the residual interest in the assets of an entity that remains after deducting its liabilities. If options and warrants do not
meet the definition of liabilities, then they must meet the definition of equity. A liability is an obligation that embodies a future sacrifice of assets. The
company owes no assets to option or warrant holders. There is no present obligation to surrender assets or perform services. If stock options and
warrants do not meet the definition of ... Show more content on Helpwriting.net ...
Although the holders of options and warrants are not owners until they exercise their rights, they are not creditors either. Moreover, the price paid to
acquire stock options and/or stock warrants is a function of the market price of shares of stock. The value recorded is related to and derived from
equity in the company.
Team 2
Argue for reporting options and warrants as liabilities measured at fair value.
The reason stock options and warrants are acquired and held is because of their potential to be exercised so that the holder can acquire shares of
stock at a price more favorable than buying the stock in the market place. Even though the value of these securities derived from the market price of
the shares, the holders are not owners and cannot act as owners

A Beginner Guide For Options Trading
A Beginner's Guide To Options Trading
Learn How To Make Money with
Stock Options Introduction
When considering saving for the future, many people look into opportunities such as Roth IRAs and mutual funds. However, few people are willing to
venture into the world of trading, where investments in stocks, indices, and other securities can substantially build a savvy investor's portfolio. For
those who are willing to brave the waters of loss and gain in order to accrue income, options can seem like a foreign language. Among the various
myths that options trading is either fraught with pit–holes or risk free is an investment system that is accessible to everyone. In addition to helping
develop an investor's portfolio, options ... Show more content on Helpwriting.net ...
This can be accomplished by using stock options to purchase an underlying asset.
So what exactly are stock options? The investment education website Investopedia perhaps defines it best, stating, "An option is a contract that gives the
buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. An option, just like a stock or
bond, is a security. It is also a binding contract with strictly defined terms and properties" (Investopedia Staff, Options Basics) . Despite its many
stipulations, options trading is much simpler than the definition conveys. In short, options trading does just what the name suggests: it gives the trader
options so that he or she can potentially incur minimal loss in the event that an investment does not prove fruitful.
Here is an example of options trading: Say a trader decides to purchase the stock for a new phone application that will allow users to order groceries
while in transit. The trader may speculate that the value of the security is about to skyrocket due to the recent shutdown of similar applications and
their companies. The buyer approaches a seller, who informs the investor that the security costs $2000. However, the investor isn't sure of his
prediction and so decides to buy the asset as an option for

Strengths Of The Black-Scholes: Option Pricing Model
In 1973, Fischer Black and Myron Scholes developed the option pricing model called Black–Scholes option pricing model. The model explains how to
calculate the price of the option by using present value of the asset's price, volatility, strike price, time to maturity, and the risk free interest rate existed
in the market. Time to maturity is usually expressed as the number of days. The Black–Scholes option–pricing model can use for European call option,
which pays no dividends at zero–coupon risk–free interest rate before the option expire.
Majority of the market participants use the model for many reasons. Therefore, this paper will be carefully studies the model with detailed analysis of
the strength and weakness based on the assumption of ... Show more content on Helpwriting.net ...
The inputs are more objective than other option pricing models.
The main strength of the model is its simplicity as other variables are easy to get from market. Once the five variables are collected, the value of the
option can be calculated easily. Therefore, this give a benefit to market participants since they can compare market prices with different values based on
different inputs.
Although the model might seem as a complicated model for human calculation, the formula is simple in mathematical terms. Therefore, high–tech
computer programs are not need to compute and it can also save time.
One of advantages of the model is that investors can use the model to analyze market volatility of underlying assets. Results from the model are often
useful in practice and minimize risk even thought volatility is not constant. Then, investors will know whether the market value is rewarding
investment or not. Therefore, it acts as insurance and helps to reduce possible loss and expand profits. Black–Scholes model is not only useful for
estimating the value of the call option and hedging of option but also enlarge the approach to other derivative

Descriptive Essay About Beauty
My mom wakes me up from my comfy and safe bed. The bed is a safe environment for me to snuggle within the sheets and have recognition that i am
safe from the stress of competition. When my mom wakes me up, i awaringly face the music. My mom says, " I am going to make you breakfast,
what do you want?" First I think of things i might want, a bar? But then, I come to the conclusion of wanting my mother's tasty smoothies. My mom
tells me to get on my tights and to put on the petals and then to put pants and a shirt on . I go and fish for the perfect tights inside of my tights drawer. I
put them on and then i put some ivivva pants on over the tights, and then I put my shirt on my head, the shirt is a shirt that can come on and off
easy so it doesn't ruin my hair when my mom does it. I walk to the bathroom, all dressed, and i put on deodorant, the cooling sensation sends me a
nervous chill and i breathe and release of how i am aware i am nervous. I than put toothpaste onto my toothbrush and brush. The brushing of teeth
makes me impatient and more nervous, but then i realized that i have to continue staying in the moment. As the timer stops, my mom yells,
"EMMMMMAAAAAA," and i go down stairs and excitedly sit at the island to drink my yummy looking smoothie. I watch the smoothie slowly
become less and less until it finally makes the gurgling sound of a finished drink. My mom tells me that she has to do my hair, i sigh. Getting my hair
done makes me more nervous, i do not know if

Mengchao Essay
rP os t
5 – 2 9 6– 0 7 0
REV. JANUARY 29, 2004
TEACHING NOTE
op yo Arley Merchandise Corporation
Objectives and Synopsis
The Arley Merchandise Corporation represents an example of a corporate issuer attempting to realize a higher price for its common shares by offering
potential investors a "money–back guarantee." In this instance, the guarantee takes the form of a European put option (called a "Right" in the case)
which is exercisable two years from the date of issue.
In some ways, the case represents an example of the design of a security to overcome information asymmetries in the capital markets. Arley's
management has projected a highly confident picture to the underwriters that the company's future profit ... Show more content on Helpwriting.net ...
The unit proposed for sale in the Arley financing then can be characterized as the sale of a share of common stock plus a two–year European put option
with a strike price of $8 or, alternatively, through put–call parity, as the sale of a two–year zero–coupon note with face value $8 plus a two–year
European call option on common stock with an exercise price of $8. Thus, the value of the unit can be broken down in two ways: tC
Market value of the unit
= Market value of stock + market value of put option
= Market value of zero–coupon bond + market value of call option
No
Applying the Black–Scholes model with a two–year riskless rate of 11% per annum, an initial stock price of $6.50, and a volatility of 40% (as

indicated in the assignment question), yields values of the put and call options of $1.44 and $1.45, respectively.1 Exhibit 4 shows historical volatility
data for comparable firms. The instructor can engage the students in a discussion of how to use this information in the analysis. The Appendix to this
teaching note contains a discussion of these comparables and sensitivity analysis. However, Black–Scholes is not necessarily applicable because of
default risk associated with this particular put option. That is, put option holders will wish to exercise their right to receive cash at precisely the time
that Arley's stock is low, which is also when the firm will least be able to fund the $8

Loan Diagrams With Detailed Analysis And Investigation Of...
Executive Summary
This course work purposes to research the basics of options, payoff diagrams with detailed analysis and investigation of the Greek letters. The first
part of this work includes some basic of options for introduction of this topic. The second part contains an analysis of payoff diagrams for put and call
options that are based on simple examples for clearness. The next part presents theory and analysis of the Greek letters that based on Bloomberg data.
Table of Contents Introduction Literature Review Basics of Options Payoff Diagrams for Options Black–Scholes model The Greek letters in Theory
The Greek letters in Practice Conclusion References
Introduction ... Show more content on Helpwriting.net ...
The third and important use is a hedge. Hedge is a trading strategy in which derivative securities are used to reduce or completely offset counterparty's
risk exposure to an underlying asset [1] (Brown, 2012). Some research has shown that the options allow creating hedged portfolio that generate excess
returns, which is not only covers risks, but also makes the portfolio is sufficiently speculative. Also a total risk is reduced compared to the portfolio
which is not being hedged.
As options theme is very broad, the main aim of this course work is analysing option basics and the Greek letters. And it is organized as follows.
In Section 1 options basics are introduces. In Section 2 payoff diagrams for different types of option are explained by simple examples for clearness.
In Section 3 the Black and Scholes model and the Greek letters are shown in theory. Then Section 4 introduces detailed analyses of variation of the
Greek letters with stock prices. Section 5 concludes the course work.
Literature Review John C.Hull, 2012, "Risk Management and Financial Institutions". Paul Wilmott, 2000, "Derivatives. The theory and practice of
financial engineering". Don M.Chance, Robert Brooks, 2010, "An Introduction to Derivatives and Risk Management". Frank K.Reilly, Keith C. Brown,

Essay on Exam
FINS 5535 Derivatives and Risk management Techniques Group Assignment
Implied Volatilities & Volatility Smiles
1. Why does the target cell in the Solver minimization reference the control variate estimate of the American Put option instead of the value as implied
by the tree?
It is because that control variate estimate is more accurate than the implied value by the tree. The error of the binominal tree can be reduced by using it
only to calculate the difference between the price of the American and the equivalent European options with the same strike and the same time to
maturity.
2. Use Solver to find the implied volatilities for all put options with strike prices between $70 and $100 that are divisible by 5 and ... Show more content
on Helpwriting.net ...
Enter a start date of your choice and then enter in the field for expiration date =settlement+182 for the first maturity. Submit the table and the graph.
5. Fix the time to maturity at 365 days. Now vary the strike price as before and also vary the interest rate between 1.0%, 4.0% and 7.0%. Submit the
table and the graph.
6. Describe briefly how the EEP depends on the parameters we varied in this exercise.
From the results we observe that early exercise premium increases at different maturity dates for the same strike price and when varying strike price
with the same maturity date the early exercise premium increases non linearly in an upward trend. The shift in the trending from options 1, 2, 3 can be
explained by the maturity, as maturity increases an Americanoption is more worthwhile because more node exist where it is possible for us to
exercise early. From the results early exercise price as a function of strike price, maturity and interest rate, increases when we hold maturity constant
and vary the other two. The shift in trending can be explained by the increase in interest rates for options 1, 2, 3 respectively. When interest rate is
increased the present value of the underlying drops and the likeliness of the option being in the money increases and therefore the value of put option
increases.

Oscillation in the Binomial Tree
7.

Cf Homework Solution
Homework Solution2010Fall second half
Ch14
18.There are several ways to approach this problem, but all (when done correctly!) should give approximately the same answer. We have chosen to use
the regression analysis function of an electronic spreadsheet program to calculate the alpha and beta for each security. The regressions are in the
following form:
Security return = alpha + (beta ( market return) + error term
The results are:
| |Alpha |Beta |
|Executive Cheese |–1.44 |0.21 |
|Paddington Beer |1.33 |0.19 |
The abnormal return for Executive ... Show more content on Helpwriting.net ...
d.Some investors (e.g., pension funds and security dealers) are indifferent between $1 of dividends and $1 of capital gains. These investors should be
prepared to buy any amount of stock with–dividend as long as the fall–off in price is fractionally less than the dividend. Elton and Gruber's result
suggests that there must be some impediment to such tax arbitrage (e.g., transactions costs or IRS restrictions). But, in that case, it is difficult to
interpret their result as indicative of marginal tax rates.
e.The tax advantage to capital gains has been reduced. If investors are now indifferent between dividends and capital gains, we would expect that the
payment of a $1 dividend would result in a $1 decrease in price.
Ch18
9.a.The two firms have equal value; let V represent the total value of the firm. Rosencrantz could buy one percent of Company B's equity and borrow
an amount equal to:

0.01 ( (DA – DB) = 0.002V This investment requires a net cash outlay of (0.007V) and provides a net cash return of:
(0.01 ( Profits) – (0.003 ( rf ( V) where rf is the risk–free rate of interest on debt. Thus, the two investments are identical.
b.Guildenstern could buy two percent of Company A's equity and lend an amount equal to:
0.02 ( (DA – DB) = 0.004V This investment requires a net cash outlay of (0.018V) and provides a net cash return

Notes On Share Trading Strategies
Introduction
Share Trading Strategy Benefit and Risk
Option Definition
An option is a contract that gives buyer the right or option to either buy or sale asset at the particular price on or before the expiration date. The asset
can be any type of investment with unsustainable price such as stock, property, currency, gold, and so on.
Options are classified according to the way in which they can be exercised. United States–style warrant used by many countries can be exercised at any
time up to the expiry date. In contrast, in Europe option can only be exercised on the exact expiry date itself.
Option generally cost less money, less risk, capping losses to a maximum amount than buy directly at the market price. It is most often used in ... Show
more content on Helpwriting.net ...
Bob agree to sale his shares to Ken for $20/share next month. However, Ken need to pay to purchase this option. Bob and Ken agree that the fee for
the option is $200 which also called premium.
If the price for M&S share shoot up to $30 next month, Ken can exercise the option and Bob is forced to sale his shares at strike price. This means Ken
can buy 100 shares from Bob for $2000 plus $200 fee paid for the option and sale them for $3000, his profit is $800. Ken gets to participate and
involved in the movement of the stock at the fraction of the usual price.
If the unthinkable happen and the price fall to $15 than Ken only losses the $200 he paid for the option. There is no point Ken paying $20 for Bob
shares when he can buy them cheaper in the market. For people who buy the shares directly from the market will lost $500 while Ken who exercise
the option from Bob for $200 the absolute most he can lose is $200 he paid for the option.
However, the buyer needs to consider the risk of losing the premium for buying an option in case the price goes up or down because if he just bought
bunch of stock option contracts carelessly, he need to pay for a premium which also known as guaranteed initial loss.
This example demonstrates two very important points;
1.When Ken buys an option, he has a right but not an obligation to do something. He can always let the expiration date go by, at which point the option

becomes

Finance
SEAT NUMBER: ............. ROOM: .................... FAMILY NAME................................................. This question paper must be returned. Candidates are
not permitted to remove any part of it from the examination room. OTHER NAMES............................................... STUDENT
NUMBER......................................... MID–YEAR EXAMINATIONS 2011 Unit: ACCG252: Applied Financial Analysis and Management Date:
Tuesday 14th June 2011 at 8:50am Time Allowed: 3 hours plus 10 minutes reading time. Total Number of Questions: 30 Multiple Choice Questions
plus 9 full response questions. Instructions: 1. PART A (30 marks): There are 30 multiple choice questions. Answers to these must be recorded on a
red–coloured General Purpose Answer Sheet which will be marked by a computer. Please make sure your name is on... Show more content on
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The firm has no preference shares. The current debt–to–equity ratio is 0.58 and the after–tax cost of debt is 6.4%. The company just hired a new CEO
who is considering eliminating all debt financing. All else constant, what will the firm's cost of capital be if the firm switches to an all–equity firm? A.
14.14% B. 13.37% C. 12.62% D. 12.89% E. 11.45% 9. Which one of the following statements is accurate for a levered firm? A. A reduction in the
risk level of a firm will tend to decrease the firm's WACC. B. An increase in the market risk premium will decrease a firm's WACC. C. WACC
should be used as the required return for all proposed investments. D. A firm's WACC will decrease whenever the firm's tax rate decreases. E. The
subjective approach totally ignores a firm's own WACC. 5(34) 10. Assume that you are comparing two firms which are identical, with one exception.
Firm A is an all–equity firm and Firm B has a debt–to–equity ratio of 0.60. All else equal, Firm A will: A. have lower EPS than Firm B when the level
of EBIT is relatively low B. generate a lower EBIT, but higher net income than Firm B C. always have higher EPS than Firm B, since it has no
interest expense D. have lower EPS than Firm B when the level of earnings before interest and taxes (EBIT) is relatively high E. generate a higher
EBIT, but lower net income than Firm B 11. Yamba Prawns Limited has just

Financing the Mozal Project
FINS 5535 Computer Assignment For this assignment, you may work in groups of up to four. The due date for the assignment is Friday, 1 June, 2012
by 6:00pm. You may hand in the assignment at the Banking and Finance assignment boxes on the ground floor of the Australian School of Business
building. To find the assignment boxes, go to the west elevator (further from the bookstore, closer to the Roundhouse), and go straight out the back
through the glass doors (left of the elevator). On the left–hand side you'll see the Banking and Finance assignment boxes. Let's use Assignment box 2.
I'll put up a sign closer to the due date. Or, you can hand them directly to me, or bring them to my office during my consultation hours. Please do not
disturb... Show more content on Helpwriting.net ...
Binom(i, n, p ) ? f i ,n , i ?0 n
where i = the number of "up" ticks, n = total number of steps in the tree, the payoff fi,n is the same notation used in Ch. 19, and Binom(i, n, p) is
the binomial probability of having i up ticks out of n steps when the probability of an up tick is equal to p. (In fact, Binom(i, n, p) = n! p i (1 ? p )
n ?i .) i !(n ? i )! Note that these spreadsheets were also designed so that they could (fairly) easily be made larger. You should be able to use Copy
and Paste in order to make these trees as big as you like. Note, however that if you do make the tree larger, you need to change the number for n (in
cell L5). The time to maturity, T, and the number of steps, n, are independent of each other. Acquaint yourself with theoption pricing spreadsheets,
Puts&Dvd.xls, Call&Dvd.xls TrinCall.xls and TrinPut.xls. At the top of each spreadsheet you'll find all the input variables: r = rate = risk–free rate per
annum (continuous compounding), q = dividend yield per annum (also with continuous compounding), S = current stock price, X = exercise price, ?
= sigma = volatility per annum, as well as the Settlement Date (normally the date on which the option was traded), the Option Expiry Date, and for the
two spreadsheets Puts&Dvd.xls and Call&Dvd.xls we also have Next Dividend Payment Date, the Dividend Payment, and the Number of Dividends
per year. The spreadsheet automatically calculates T = time to expiration (in years, assuming 365 days

Financial Concepts
Financial Principles and Concepts
Nicole Ruthig
FIN/571
December 10, 2012
Gurpreet Atwal
Financial Principles and Concepts Financial concepts can be used when a company is considering various options. Which options cost more and
which options will result in higher gains are two of the financial factors that affect decisions. In the University of Phoenix (n.d.) scenario, Guillermo's
Furniture Store has several options to consider which can help bring the revenues back to the company. This paper explains and relates three basic
principles and concepts to the scenario.
Financial Principles When it comes to corporate finance, there are many principles that are important. These include the principles of ... Show more
content on Helpwriting.net ...
Financial Concepts Financial concepts are just as easily related to the furniture store scenario as the principles. The following concepts are only a few
of the many financial concepts that are important when making business decisions. Guillermo's furniture store provides many ways to look at these
concepts. An important financial concept, that can be applied in almost any situation, financial or not, is the concept of the opportunity cost, or "the
difference between the value of one action and the value of the best alternative," (Emery, Finnerty, & Stowe, 2007, p. 20). Options are very valuable
and Guillermo had both the call option, the right to buy another company, and the put option, the right to sell his company (Emery, Finnerty, & Stowe,
2007). Guillermo's opportunity cost would be the cost of not choosing one option, to buy or sell, over the other. Another cost concept that can be
applied involve sunk costs, costs that have already been incurred and subsequent decisions cannot change them (Emery, Finnerty, & Stowe, 2007). A
sunk cost for Guillermo would be the materials used in his special stain that he had already purchased before he chose the broker option where his
special stain was no longer needed. The zero–sum game concept is when a transaction occurs where one party gains at the expense of the other
(Emery, Finnerty, & Stowe, 2007). In this scenario, if

Effect Of Put Call Parity Essay
Effects of put call parity.
Option traders ought to have a decent comprehension of one of the establishments of choice estimating, the hypothesis of Put/Call Parity. Put/Call
equality implies that the estimation of a call alternative suggests a specific reasonable esteem for the comparing put, and visa versa. To clarify why
this evaluating relationship dependably holds, the whole contention depends on arbitrage. If the estimation of puts and calls were to veer, arbitrageurs
would venture into dispose of any takeoff from put call equality by making a benefit on hazard free exchanges.
The relationship is strict just for European–style choices yet the idea works for American–style alternatives in the wake of modifying for profits and
intrigue rates. Dividends raise put values and diminish call values. If the profit is expanded, the puts terminating after the ex–profit date will ascend in
esteem, while the calls will diminish by a comparable amount. Changes in financing costs have the inverse impact on put and call values. Rising loan
fees increase call values and reduce put values.
So what happens if the puts and requires a benefit are not in parity? There are various techniques that can be utilized for choice arbitrage. The most
normal are the change and turn around conversion. The transformation includes having a long position in the stock while all the while purchasing a put
and offering a call (at a similar strike price). An invert transformation (frequently called an

Option and Value
1. _____ is the rate of change of delta with respect to the price of the underlying asset.
a. Gamma
b. Theta
c. Rho
2. The short term risk–free rate usually used by derivatives traders is
b. The LIBOR rate
3. Duration of a ten–year 6% coupon bond with a face value of $100 is
a. Less than 10 years.
4. Which of the following are always positively related to the price of a European call option on a stock?
c. The volatility
5. When we talked about Vega hedging, if a portfolio has 1000 shares of SPY and 10 contracts of at–the–money December 2013 put option on SPY
(and nothing else in the portfolio), is the portfolio vega neutral?
c. No, the portfolio can never be vega neutral.
6. Which of the following is not true?
a. ... Show more content on Helpwriting.net ...
(a) In this case, change in t = 0.25 so that
u = e0.40 x в€
љ0.25 = 1.2214, d = 1/u = 0.8187, a = e0.03 x 0.25 = 1.0075, and p = (1.0075 – 0.8187) / (1.2214 – 0.8187) = 0.1888/0.4027 = 0.4688
(b) The price of this stock at node A is 50;
The price of this stock at node B is 50u = 50*1.2214 = 61.07;
The price of this stock at node C is 50d = 50*0.8187 = 40.93;
The price of this stock at node D is 50*u*u = 50*1.2214*1.2214 = 74.59;
The price of this stock at node E is 50*u*d = 50;
The price of this stock at node F is 50*d*d = 50*0.8187*0.8187 = 33.51;
The value of the put option at node D is 0;
The value of the put option at node E is 5;

The value of the put option at node F is 21.49;
The value of the put option at node B is e–0.03 x 0.25[0.4688*0+(1–0.4688)*5] = 2.63;
If no early exercise, the value of the put option at node C would be e–0.03 x 0.25[0.4688*5+(1–0.4688)*21.49] = e–0.03 x 0.25[2.3440+11.4155] =
13.66;
If early exercise at node C, the payoff of the American put option should be 14.07;
Thus, it is optimal to early exercise at node C, and the value of the put option at node C is 14.07.
If no early exercise, the value of the put option at node A is e–0.03 x 0.25[0.4688*2.63+(1–0.4688)*14.07] = e–0.03 x 0.25[1.23+7.47] = 8.64 ;
If early exercise at node A, the payoff of the American put option should be 5;
Thus, it is optimal to wait at node A and the put option at node

Theory, An Optimal Executive Compensation Scheme Essay
In theory, an optimal executive compensation scheme overcomes the principal–agent problem by aligning the interests of executives and shareholders,
and subsequently providing executives an incentive to maximise shareholder value. Furthermore, an executive compensation scheme must be sufficient
to attract and retain the appropriate executive. According to Bognanno (2014), restricted stocks and stock options are the most common forms of
equity–based compensation schemes, with stock options accounting for almost half of US CEO compensation in 2000. Since economic agents respond
to incentives, the intuition behind equity–based compensation schemes is that providing executives with a form of compensation that is tied with the
performance of the company, will provide an incentive for the executive to maximise shareholder value. For instance, assume an executive is provided
with a stock option of 100 stocks with a strike price of $10, the executive will only receive a payoff if the stock price is above $10 (see Figure 1). If
the stock price is above the strike price, the executive is able to exercise the option by purchasing the stock at $10 and selling the stock on the spot
market. Since the executive has an incentive to maximise his or her payoff, the executive's interests are in theory, aligned with shareholders and the
executive is expected undertake activities which maximises shareholder value.
DiPrete et al. (2010) suggest that executive compensation practices cannot be

Week5Homework
Why would an investor be interested in convertible securities? (What do they offer to the investor?)
A convertible bond is a bond that can be converted into a pre–determined number of shares of stock. This would happen during the life of the bond.
The number of shares it can be converted to is determined by the issuer of the bond, the corporation. Convertible bonds are an attractive investment.
They offer the for potential market appreciation like an equity. They also offer the conservative nature and safety of a bond. A convertible bond pays
you interest and gives you the option to convert it to shares of stock.
A convertible bond has a face value of $1,000, and the conversion price is $50 per share. The stock is selling at $42 per... Show more content on
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They can also be tailored to meet expectations that go beyond a simple "the stock will go up" or "the stock will go down". Once you move beyond
learning options terminology, you need to develop a thorough understanding of risk to trade options successfully. The value of calls and puts are
affected by changes in the underlying stock price in a relatively straightforward manner. When the stock price goes up, calls should gain in value and
puts should decrease. Put options should increase in value and calls should drop as the stock price falls.
Look at the option quotes in Table 14–2 on page 368. * What is the closing price of the common stock of SINGLE Systems?
$18.93
* What is the highest strike price listed?
$25.00
* What is the price of a December 20 call option?
$1.10
* What is the price of a January 22.50 put option?
$4.20
How does the concept of margin on a commodities contract differ from that of margin on a stock purchase?
Margin requirements on commodities contracts (2–10 percent) are much lower than those on stock transactions, where 50 percent of the purchase price
has been the requirement since 1974. Furthermore, in the commodities market, the margin payment is merely considered to be a good–faith payment
against losses. There is no actual borrowing or interest to be paid.

How can using the financial futures

The Pros And Cons Of Executive Compensationation
According to Garen (1994) executive compensation is a classical solution of the principal–agent problem in which the separation of ownership and
control is the main issue. He explains in his paper that in every business there are different parties involved with different interests and goals, and the
theory describes the relationship between two parties, principal and agent, where the principal passes the task to the agent. In this case the CEO is the
agent and the principal is the shareholder of a firm. The attitude of the CEO in a firm is different than that of the shareholders; therefore shareholders
provide equity compensation and other awards to align the interests. According to Jensen and Meckling (1976) the reduction of the agency conflict...
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There are several types of equity compensations with variety of impacts on the agents. The stock compensations and stock options compensations are
the most prominent ones. The stock compensations are awards provided to the agents in stocks of the firms, in this way the shareholders reward
agents by awarding them a part of the equity of the firm. Balsam and Miharjo (2007) have the belief that stock compensation provides direct link
between executive compensation and shareholders wealth and therefore the interests of a firm's CEO's with those of its shareholders. Therefore, this
type of executive compensation is very effective in aligning the principal and agent's interest. However, stock compensation has negative side effects,
such as an increase in risk aversion of CEO's. By providing more stocks to a CEO, the risk attitude of CEO in a firm becomes different than that of
the shareholders: whereas CEO's will be loyal with most of their capital to their corporations trying to avoid risk while shareholders aim is to
maximize their gains, and prefer more risk taking operations. Therefore, it is very important to provide the right executive compensation to motivate
agent (CEO's or executives) to act in the best interest of the principal (shareholders, debtholders) to mitigate the agency problem created by the
provision of the stock

Executive Compensation Package, Stock Options
Executive compensation packages have been used both successfully and unsuccessfully to solve the principal–agent problem facing corporations these
days. In this study, we focus on a specific element of an executive compensation package, stock options. The use of stock options as a form of senior
executive compensation has been studied extensively to be a testament to the success of it's ability to realign executive with shareholder interests.
However, as the study reveals, prior to the Sarbanes–Oxley Act of 2002, there were many problems with the usage of stock options within corporations
that had a weak corporate governance structure. Problems included executive's incentives to focus on short run profit, take on risky business strategies,
and manipulations (legal and illegal) to fulfill executive self–interests. While it is difficult to measure the true effect of stock option's influence on
executive performance and behaviors, we see that the problems with stock option usage far outweigh the benefits of stock options prior to the
implementation of the Sarbanes–Oxley Act.
In the ideal corporate governance system, the definition of a good senior management executive is one that takes into consideration shareholders' needs
above his own. They work diligently to run the corporation both on a day to day basis and to ensure its success in the long run. However, there are
often many incentives that disalign the interests between the shareholders (principal) and executives

The Black And Scholes Model
Statement 2: "The Black and Scholes model is an ideal method to value Options"
The Black Scholes Merton (BSM) model is the best–known model for valuing options as it is the original of many option pricing models today (Haug
and Taleb, 2009; Le, 2015). Developed in 1973 by Fisher Black, Myron Scholes and Robert Merton, the BSM model is still widely used today as the
benchmark for many models and techniques that financial analysts use to analyse and determine the fair prices of given options (Jumarie, 2010). It is
widely used due to its simplicity however there are many criticisms regarding the assumptions made by the model (Bharath and Sumway, 2008; Haug
and Taleb, 2009; Le, 2015)
The BSM model is used to determine fair prices of European options only following a formula (as shown below) with the first basic assumption that the
underlying commodity, stock, or option pay zero dividend to its shareholders group being purchased during the option life (CFA, 2015).
In order to set the option pricing model, other basic assumptions have been used such as the market is efficient and frictionless which means that
people cannot predict with consistency the direction of stocks in the financial market; no tax or transaction costs occur and there are no legal
restrictions on trading in the options and in the underlying asset, or on short–selling the asset (Data and Mathews, 2004; Jiang, 2005). The BSM model
also assumes that the market is arbitrage free which indicates there

Hedging Strategies For Minimizing The Underlying Risk Of...
This report is aimed at utilising hedging strategies to minimise the underlying risk of stock portfolio. During our simulation, we mainly implemented
two strategies to hedge down–side risk, which were protective and put straddle. First of all, a discussion about implementing such two strategies in the
trading process would be presented. After that, the outcome of our strategies would be analysed, including the gross profit and the net profit. Finally,
we are going to seek the arbitrage opportunities based on the put–call parity. However, we were not able to capture these opportunities as a result of
time restrictions. If no hedging strategies are used, it is likely to suffer a loss.
Introduction
From the figure belowпј€
е“ЄдёЄfigureпј‰ it is ... Show more content on Helpwriting.net ...
For this assignment, the task is to hedge POGO's securities position of 100,000 shares in 3 months of the trading sessions, thus, the combination of
using buy or sell put and buy option is necessary to achieve such mission[дёЌи¦Ѓдє†]. Before the start of this trading round, it is difficult to predict the
pattern of price. However, based on the previous two practice trading rounds, which the price trend is downward, our group decided to adopt the
protective put buying strategy at the beginning.. The advantage of protective put buying is to provide limited loss and unlimited profit. Back to the
trading round, in the beginning period, our group bought a few put options, including 200 contracts of Jan 24P, 100 in Jan 22P, 100 in Jan 21P, 400
in Mar 24P, 300 in Mar 23P . In general, the price pattern could perform in two situations which are going up and going
down.[иї™дёЄж€‘ж”№д
є†еЏҐећ‹] Assuming the price of stock is rising later, the profit that our group gain is coming from the price increasing of
holding shares, which should minus the cost of buy put option. If the stock price is going down to less than exercise price, then our group could gain
profit from put option and total profit is gathering(д»Ђд№€ж„
ЏжЂќ) from the exercise price. According to the appendix XXX, our group gained a
gross profit of $42,394. During the 'frozen time' before the second round, we thought there would be a

Essay On Option Pricing
Option Pricing
Paper trading really helps you grasp the fundamentals, However, when buying and selling options in the open marketplace with real money, things
change quite a bit. During your simulations I bet you wondered about option pricing. If you wanted to geek out, you could use a complicated formula
like the infamous Black and Scholes equations. Instead of eating aspirin by the hand full, let's just focus on the basics. An option is a derivative, which
means that it is based on the value of another asset. Thus, the stock price or underlying asset is an important feature in determining the pricing. When
you want to buy a stock, you want to buy it for a cheap as possible, this works the same way for options. Here are the factors ... Show more content on
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You make money with an option if there is a favorable change in price of the underlying asset, but this must happen before expiration. Therefore, the
longer the lifetime of the option, the better chance there is for that opportunity. Generally, the more time remaining on an option makes it worth more>
However, there is also more time for the stock to move in an unfavorable direction as well.
TYPE OF OPTION:
The type of option (put or call) is also highly relevant to pricing. Calls are expected to increase in value as the price of the underlying asset
increases. While puts are expected to increase in value as the underlying asset's price decreases. The other factors discussed can also affect the option.
Options for stocks that pay a dividend are often worth less because the dividend is priced into the option. VOLATILITY: Some would argue that
volatility is the greatest factor in determining the price of an option in the marketplace. Realistically, all of the other factors, strike price, type, interest
rates, dividend, are known, where volatility isn't. Since options are derivatives, stocks and options are interconnected. For either investment, volatility
is one of the most important elements to consider. As an option buyer, you can use historical movements in price to make some projections. However,
option prices are based on IV implied volatility. Implied volatility, most often

Michael Stevens Option Strategy Essay examples
Introduction Michael Stevens is a relatively new investor struggling to maintain profits in an uncertain economy. Recent conflicts and conflicting
reports have left the Canadian Market muddled and somewhat divided. Michael capitalized on recent volatility in the market and has gained some
unrealized profits. He sees a bullish economy returning in the near future but would like to ensure that his profits are maintained even through minor
volatility for the next six months. He plans to do this through investing in options and is considering several different strategies.
1. Assessment of the Six–Month Outlook for the Market Only four years prior to Michael's considerations, there was a significant market crash
lowering the average value of ... Show more content on Helpwriting.net ...
This strategy is generally used to protect unrealized profits investors have made. The index is usually chosen after a correlation has been observed.
The index must have consistent movement or a high beta with the portfolio for the strategy to be effective. Index puts work no differently than
regular puts, they limit downside and they similarly have American and European style options. Similar to regular puts an increase in volatility has a
positive effect on the price and as time to expiration shrinks the value also drops. d) Writing an index call is very similar to writing a stock call except
the underlying asset is a basket of stocks that are grouped from particular sectors or indices. Similar to buying index puts, an investor should pick an
index that has correlated movements with their portfolio or else the strategy will not be effective. Writing index calls is most commonly utilized
when an investor is bullish on an underlying stock or portfolio but would like to provide a little protection in case of minimal volatility or to gain
some extra income. The main difference between stock and index options is that index options are most commonly used as protection for a varied
portfolio. It is crucial that a correlation between the portfolio and the index is established prior to investment. 3. Black–Scholes Model – The Implied
Volatility The implied volatility of anoption can be derived if one believes that the market is pricing the

The Greed Cycle Essay
Article Review: – The Greed Cycle, by John Cassidy
The article by Thomas Cassidy, points out the instrumental role that greed plays in the modern corporation. Modern Economists have always seen
greed as not only a necessary element in the corporate environment, but as also a vital part of the successful evolution of a public company. As the
article points out, "Economists from Adam Smith to Milton Friedman have seen greed as an inevitable and, in some ways, desirable feature of
capitalism. In a well regulated and well balanced economy, greed helps to keep the system expanding".
In the early public companies, greed was not seen as a danger, as the implicit trust that managers would not slack off, and would run the company in the
... Show more content on Helpwriting.net ...
They went on to state that competition would not solve this dilemma. This lead to a re–evaluation of the goal of corporations, from merely maximizing
revenues, to maximize the value of the firm, as it was determined in the stock market.
Once the goal of corporations became maximizing the value of the firm, they attracted wealthy "corporate raiders", who used this new corporate
philosophy to launch many takeover attempts on companies, with the intent on restructuring these companies, as to increase their stock prices, so that
they can "refloat" them for a considerable profit. Most of these takeovers were financed with borrowed money, hence the term leverВaged buyouts, or
LBOs. As the article states, "In a typical LBO, the acquirer would buy out the public stockholders and run the comВpany as a private concern, slashing
costs and slimming it down. The ultimate aim was to refloat the company on the stock market at a higher valuation". Initially this was seen as one of
the best remedies for the agency issues that surfaced between shareholders and mangers. However as the economic climate changed, many realized that
the LBO was not the answer. "When the economy went into a recesВsion during the early nineteen nineties, many of the firms that had gone private,
such as Macy's and Revco, couldn't keep up their interest

Stock Options-Acc 499 Capstone
Name
April 10, 2011
ACC499–Accounting Capstone
Professor
According FASB, compensation plans include all arrangements by which employees receive shares of stock or other equity instruments of the
employer or the employer incurs liabilities to employees in amounts based on the price of the employer's stock. Compensation cost should be
measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period, under the
fair value based method. Compensation costs are recognized for other types of stock–based compensation plans under Opinion 25, including plans with
variable, usually performance–based, features. Some stock–based compensation plans require an employer to pay ... Show more content on
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The ccomponents of executive compensation include: * Salary: Annual base salary earned during the fiscal year. * Bonus: Annual non–equity incentives
earned during the fiscal year, plus discretionary bonuses. * Other: Includes long–term, non–equity incentive payouts, the value realized from vesting of
restricted stock and performance shares. Also includes other executive personal benefits, such as premiums for supplemental life insurance, annual
medical examinations, tax preparation and financial counseling fees, club memberships, security services and the use of corporate aircraft. * Stock
gains: Value realized during the fiscal year by exercising vested options granted in previous years. The gain is the difference between the stock price
on the date of exercise and the exercise price of the option. (Forbes)
Stock options are another main concern and are based upon the performance of a company. A lot of companies are in a low return and low
compensation which then caused bad business and it's about 400 times that amount. I believe the government is trying to tighten down on excessive
executive compensation with implementing salary caps. Executives are unrealistic with common life and way of living therefore; they do not take any
consideration with the underdogs of the company or the world. The economy does have hope but it's a long way from being stabilized once again.
References
DeCarlo, S. (2009,

Risk Management : Analysis Of Derivatives
Risk Management
Professor: Henry Silverman
Simran Preet Kaur
Reema Kathuria
FIN 485– (Investment Theory)
This paper talks about risk management, analysis of derivatives in the financial market and how it affects the decisions of where to invest, whether to
buy a particular derivative, mutual funds. However, it focuses on how to use options in the analysis of derivatives. The word options has many
different meanings, but most of them include the availability or right to choose a certain alternative. Basically, it is the right, acquired for a
consideration, to buy or sell something at a specific price in future.
Risk Management is a practice that helps in identifying the potential risks in advance, analyze them and take ... Show more content on Helpwriting.net
...
We can buy a put and sell a put on it. We can buy a call and sell a call on it. Call is a bullish strategy that we can buy and assuming that the price is
going up. Put option is a bearish strategy, which means that the stock price is going down and individuals can make money. Trading stocks are more
risky than options.
Put Option
The options that gives the right to sell the stock at the specific price, also known as strike price at a future date.
The put options allows to gain if the stock price falls.
In the portfolio, it protects the portfolio and lock in gains.
Exercise price:–
Price of the contract that is specified for a buyer or a seller.
Also knows as strike price
Option Premium:–
Gains received by the stockholder who sells or writes a contract to another party.
Security's price, life of the option and implied volatility are the factors that affect option premium.
Security Price– If the price of the security is higher, the option premium will be higher and if it is lower, the option premium is lower. There is a direct
relationship between the security price and the option premium.

Life of the option– The longer the life, higher the premium, shorter the price, shorter the premium. The chances of change in stock price is higher in
the long run as compared to short run.
Implied Volatility– It is the approximate future value of the option and the current value is taken into consideration.
In our portfolio, we started with the

Sally Jameson Case
TEACHING NOTE
Sally Jameson: Valuing Stock Options in a Compensation Package (Abridged)
Objectives
This case has two educational objectives. First, it serves as an introductory case on option valuation in which students can use market data to place a
dollar value on an option they are likely to encounter in their business careers. As such, the case encourages a discussion of the application of option
pricing models, such as Black–Scholes, and exposes students to popular misconceptions of how options should be valued. Second, the case permits a
discussion of the wisdom and efficacy of incentive stock compensation plans using options.
Synopsis
This case details a thinly disguised situation faced by a recent Harvard MBA graduate ... Show more content on Helpwriting.net ...
The case suggests to students that they first attempt to value the option assuming that Ms. Jameson expects to stay at Telstar for the full five years
needed to vest, and ignoring taxes and the lack of tradability of the option grant. The grant gives Ms. Jameson a European call on a non–dividend
paying common stock currently selling at $18.75, with an exercise price of $35.00, and a maturity of five years. (In practice, this type of option
would be structured so as to vest over the five–year interval, and exercisable over a window from perhaps five to ten years from the date of grant.) The
student has to choose between a cash grant of $5000 or 3,000 out–of–the–money calls. Students ' first impressions will likely be similar to those of the
executives quoted in the supplementary The Wall Street Journal article: "Out–of–the–money options are worthless." However, given the volatility of
Telstar common stock, their analysis should convince them that these options are far from worthless.1 To value this European call, students need to
assess the likely volatility of Telstar common stock, and they have both data that can be used to calculate the historical volatility (Exhibit 3) as well as
all of the options quoted on Telstar (Exhibit 1). Instructors can use the case to discuss the mechanics of working through Black–Scholes (e.g., how to
back out

Accounting for Compensation at a Company Essay
Re: Murray Compensation, Inc.
Facts
Murray Compensation, Inc. (Murray), an SEC registrant that provides payroll processing and benefit administration services to other companies,
granted 100,000 "at–the–money" employee share options on January 1, 2006. The awards have a grant–date fair value of $6, vest at the end of the
third year of service (cliff–vesting), and have an exercise price of $21.
Subsequent to the awards being granted, the stock price has fallen significantly. On January 1, 2008, Murray decreased the exercise price on the stock
options to $12. This downward adjustment to the exercise price was made in order to ensure that the options continue to provide intended motivation
benefit to employees. However, in addition ... Show more content on Helpwriting.net ...
The awards at issue in this case were issued after June 15, 2005 and therefore must be accounted for under the provisions of FAS 123(R).
FAS 123(R) 5 states that an entity should recognize services received in a share based payment transaction when those services are received. 10 states
that an entity shall account for compensation cost from share–based payment transactions with employees in accordance with the fair–value–based
method. Under the fair–value–based method, the cost of services received from employees in exchange for awards of share–based compensation shall
be measured based on the grant–date fair value of the equity instruments issued. A10–A17 discuss the acceptable methods of calculating fair value at
the grant date. The grant–date fair value of the Murray options is $6. Following the guidance in Illustration 4(a), Share Options with Cliff Vesting, of
FAS 123(R), compensation expense for the years ended December 31, 2006 & 2007 is $200,000 per year (calculation attached hereto).
However, at issue is the calculation of compensation expense for the years subsequent to the change in exercise price and vesting period. FAS 123(R)
51 states that a modification of the terms or conditions of an equity award shall be treated as an exchange of the original award for a new award. 51
further states that in substance, the entity repurchases the original instrument by issuing a new instrument of equal or greater value,

Murray Compensation Inc. Case Study
Re: Murray Compensation, Inc.
Facts
Murray Compensation, Inc. (Murray), an SEC registrant that provides payroll processing and benefit administration services to other companies,
granted 100,000 "at–the–money" employee share options on January 1, 2006. The awards have a grant–date fair value of $6, vest at the end of the
third year of service (cliff–vesting), and have an exercise price of $21.
Subsequent to the awards being granted, the stock price has fallen significantly. On January 1, 2008, Murray decreased the exercise price on the stock
options to $12. This downward adjustment to the exercise price was made in order to ensure that the options continue to provide intended motivation
benefit to employees. However, in addition ... Show more content on Helpwriting.net ...
10 states that an entity shall account for compensation cost from share–based payment transactions with employees in accordance with the
fair–value–based method. Under the fair–value–based method, the cost of services received from employees in exchange for awards of share–based
compensation shall be measured based on the grant–date fair value of the equity instruments issued. A10–A17 discuss the acceptable methods of
calculating fair value at the grant date. The grant–date fair value of the Murray options is $6. Following the guidance in Illustration 4(a), Share
Options with Cliff Vesting, of FAS 123(R), compensation expense for the years ended December 31, 2006 & 2007 is $200,000 per year (calculation
attached hereto).
However, at issue is the calculation of compensation expense for the years subsequent to the change in exercise price and vesting period. FAS 123(R)
51 states that a modification of the terms or conditions of an equity award shall be treated as an exchange of the original award for a new award. 51
further states that in substance, the entity repurchases the original instrument by issuing a new instrument of equal or greater value, incurring
additional compensation expense for any incremental value.
FAS 123(R) B182 states that in accounting for a modification of the terms of an award of employee share–based compensation, such transactions
generally are transfers of

Literature Analysis Of The Black Scholes Pricing Model
Abstract2
Introduction:3
Literature Review:4
1.Options & its characteristics4
2.Black Scholes Pricing Model6
Assumptions6
I.Constant volatility6
II.No Dividends6
III. European exercise terms are used6
IV. Markets are efficient7
V.No commissions are charged7
VI. Interest rates remain constant and known7
VII. Returns are lognormal distributed7
VIII. Liquidity7
4.Inputs to the Black–Scholes Model9
I.The underlying price9
II.The exercise price9
III. Time to expiration9
IV. The risk–free rate9
V. Volatility9
5.Limitations of Black Scholes Model10
6. Macro–economic Variable Effect:12
Methodology:13
Analysis:14
Limitations:19
Recommendations:20
Conclusion:21

References:22
Abstract
A credit ... Show more content on Helpwriting.net ...
Black Scholes Pricing Model
In 1973, Myron Scholes and Fisher Black developed the framework on option pricing and presented the theory in their seminal paper. With reference to
both approach and application the Black Scholes Model is considered to be one of the most significant concepts in modern financial theory. For valuing
options the Black Sholes Model is viewed as a standard model.
Assumptions
To compute the value of a stock option the Black–Scholes Option Pricing Model is used. Both call and put option can be calculated with the help of the
model. For the accurate application of the Black Scholes Pricing Model it is necessary to be familiar with its assumptions. Black and Scholes
specified the following assumptions in their seminal paper (1973). (Ray, 2012)
I.Constant volatility
Volatility refers to the movement of the stock price whether upwards or downwards. The model assumes that the volatility does not change and is
known to market participants. This implies that the variance of the return remains constant over the life of the option.
II.No Dividends
The model assumes that the underlying asset (stock) does not pay any dividends during the option's life.
III.European exercise terms are

Real Estate Planning Case Study
Plan description
In 2010, there is a large investment house company that wants to launch an aggressive campaign to encourage long–term stock investments among
private UK investors. This defined returns plan draws attract investors who look for higher returns than available in deposit accounts, but also want
to be concerned that at least the capital that they invested could be repaid. In general, this plan provides with different investment terms over four,
five, six years, whose returns are 24%, 37.5%, and 45% respectively. At the end of each term, investors could get a fixed return if the level of the
FTSE 100 index is not lower than the level on 11 January 2010 (initial index level). Note that the level index should use closing ... Show more content
on Helpwriting.net ...
In other words, it is better to grasp some information about product's issuer in case of the firm may go bankrupt in the future. After all, this security
contract will expire after five years.
Opportunity cost risk. Briefly, individuals could not withdraw a plan easily before maturity date because not all of the capital will be refund.
Therefore, people cannot reinvest if a good project appears and the yield of the new one is the opportunity cost for investors.
Liquidity risk. It means that an asset cannot be traded rapidly enough in the market to avoid a loss. Obviously, investors could get back the money if
they could sell the plan as quick as possible, otherwise they will make a great loss especially when expiration date is approaching.
Inflationary risk. When inflation happens, it will undermine the performance of investment. The capital will be shrink since actual return is not as high
as the nominal return. Although investors will receive money on maturity, the asset would be depreciated.
The types of option
Based on different characteristics about plans, four years and six years plan should be cash or nothing option and barrier option respectively. Note that
there are two assumptions: 1. Investors will not withdraw plan before maturity, so this option is European option 2. This is a call option because
investors hope that final index is greater than initial index. That is, the calls could offer profits when

Business
I
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An Introduction to
Derivatives and
Risk Management
Don M. Chance
Louisiana State University
Robert Brooks
University of Alabama
THOMSON
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Chapter 1
Preface XlII
Iuuoduction
PART I
Options 21
Chapter 2
Chapter 3
Chapter –!
Chapter 5
Chapter 6
Chapter 7
Structure of Options Markets 22
Principles of Option Pricing 54
Option Pricing Models: The Binomial Model 92
Option Pricing Models: The Black–Scholes–Merton Model
Basic Option Strategies 181
Advanced Option Strategies 218

An Introduction ... Show more content on Helpwriting.net ...
i
[
.
I
Chapter 3
Principles of Option Pricing
54
Basic Notation and Terminology 55
Principles of Call Option Pricing 57
Minimum l0lut oj a Call 57
Maximum value oj a Call 59
Value oj a Call at Expiration 59
Effect oj Time to Expiration 60
Effect ofExercise Price 62
Lower Bound oja European Call 65
American Call Versus European Call 67
Early Exercise oJAmerican Calls on
Dividend–Paying Stochs 69
Effict oj Interest Rates

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