Factors affecting call and put option prices
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The document outlines 6 primary factors that affect call and put option prices: 1) the underlying price, 2) expected volatility, 3) strike price, 4) time until expiration, 5) interest rates, and 6) dividends. Option prices increase or decrease based on whether the underlying price, expected volatility, time until expiration, and interest rates increase or decrease. Option prices also increase if the strike price is further in or out of the money and if dividends rise or fall.
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The document provides examples of using the binomial option pricing model to value various types of options, including call options, put options, and options on currencies and futures contracts. It shows the step-by-step calculations for single-period and multi-period options using the binomial tree approach.
DERIVATIVES LESSONS
Derivatives derive their value from underlying assets such as stocks, commodities, currencies, and bonds. The main types of derivatives are forwards, futures, and options. Forwards involve an obligation for both parties to fulfill the contract terms at a future date. Futures are standardized contracts traded on an exchange with high liquidity. Options confer the right but not obligation to buy or sell the underlying asset at a strike price by an expiry date. Key participants in derivatives markets include speculators, hedgers, and arbitrageurs. Common derivatives strategies involve futures arbitrage, hedging, and using options spreads. Greeks like delta and gamma help analyze how option prices change with movements in the underlying asset.
Black scholes(Venu)
The document discusses the Black-Scholes model for pricing options. It provides background on the development of option pricing models over time, leading up to the seminal 1973 Black-Scholes model. It discusses key concepts underlying Black-Scholes such as forming a riskless portfolio to derive the Black-Scholes differential equation. The document also covers properties of the Black-Scholes formula and how it can be applied to calculate option prices and analyze investment strategies.
Factors affecting pricing
Fixed and variable costs, competition, opportunity cost, demand, and supply all affect pricing. Direct competition refers to businesses selling similar products, while indirect competition sells dissimilar products. Price competition uses price to attract customers, while non-price competition uses other factors. Demand depends on factors like utility, price, advertising, fashion, and consumer needs/wants. Supply is affected by costs of production, price, demand, profit goals, competition, and technology. Elasticity of demand, economic conditions, regulations, distribution channels, and company objectives also impact price.
Portfolio management process
Portfolio refers to a collection of investments held by an individual or institution. Portfolio management is the professional management of these securities and assets to meet investment goals. The portfolio management process involves creating an investment policy statement detailing goals and constraints, developing an investment strategy based on this, implementing the strategy by investing in assets, and monitoring the portfolio and updating the strategy over time as needs and markets change.
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Qualitative analysis
The six primary factors that influence option prices are: (1) the underlying asset price, (2) volatility, (3) time until expiration, (4) strike price, (5) interest rates, and (6) dividends. Option prices increase when the underlying asset price increases, volatility increases, time until expiration increases, or the option becomes further in-the-money. Option prices decrease when the underlying asset price decreases, volatility decreases, time until expiration decreases, or the option becomes further out-of-the-money. Interest rates and dividends also impact option prices, but to a lesser extent.
Chapter 3- Interest Rate/Cost of Money/BBS 4th
The document discusses the cost of money and factors that affect it. The cost of money refers to the price paid for using money, whether borrowed or owned, through interest on debt or dividends on equity. Key factors that influence the cost of money include production opportunities, time preference for consumption, risk, and inflation. Higher production opportunities and inflation increase the cost of money while higher risk demands a higher return and therefore higher cost of money. Determinants of market interest rates are the real risk-free rate, nominal risk-free rate, default risk premium, liquidity premium, and maturity risk premium.
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Bacics of derivatives
Derivatives are financial instruments whose value is derived from an underlying asset. The four main types of derivatives are forwards, futures, options, and swaps. Derivatives can be used to hedge risk by reducing exposure to market forces beyond a firm's control. They can also be used for speculation. While derivatives provide opportunities, their misuse has also led to major financial losses, as seen in the failures of companies like Barings Bank and Long-Term Capital Management.
Bacics of derivatives
This document provides an overview of derivatives, including their basic types and uses. It discusses how derivatives derive their value from underlying variables and how they can be used to hedge risk exposure or for speculation. The main types of derivatives covered are forwards, futures, options, and swaps. Forwards and futures involve agreements to buy or sell an asset at a future date. Options provide the right but not obligation to buy or sell an asset. Swaps involve exchanging cash flows over time, such as interest rate or currency swaps. Throughout, examples are given of how the value of each derivative is determined.
Bacics of derivatives
Derivatives are financial instruments whose value is derived from an underlying asset. There are four main types of derivatives: futures, forwards, options, and swaps. Futures and forwards involve an agreement to buy or sell an asset at a future date for a set price. Options give the buyer the right, but not obligation, to buy or sell the underlying asset at a strike price. Swaps involve exchanging cash flows over time between two counterparties. Derivatives are used for hedging risk exposure and speculation. While useful risk management tools, their speculative use has also led to major financial losses at times.
Bacics of derivatives
Derivatives are financial instruments whose value is derived from an underlying asset. The four main types of derivatives are forwards, futures, options, and swaps. Derivatives can be used to hedge risk by reducing exposure to market forces beyond a firm's control. They can also be used for speculation. While derivatives provide opportunities, their misuse has also led to major financial losses, as seen in the failures of companies like Barings Bank and Long-Term Capital Management.
Option Pricing.pptx
The document discusses pricing of options. It defines what an option is, the two main types of options - calls and puts, and some key terminology used related to options. It then discusses the major factors that affect the pricing of an option, including the spot price of the underlying asset, time until expiration, volatility, distance between the strike price and spot price, and risk-free rate of return. The document also discusses intrinsic and time value that make up an option's premium price. It concludes by covering the Black-Scholes model for pricing options theoretically based on these factors.
Derivatives: Options and it's Greeks
Options are a type of derivative security. They are a derivative because the price of an option is intrinsically linked to the price of something else. Specifically, options are contracts that grant the right, but not the obligation to buy or sell an underlying asset at a set price on or before a certain date. The right to buy is called a call option and the right to sell is a put option. People somewhat familiar with derivatives may not see an obvious difference between this definition and what a future or forward contract does. The answer is that futures or forwards confer both the right and obligation to buy or sell at some point in the future. For example, somebody short a futures contract for cattle is obliged to deliver physical cows to a buyer unless they close out their positions before expiration. An options contract does not carry the same obligation, which is precisely why it is called an “option.”
Bacics Of Derivatives
The document provides an overview of derivatives, including their basic uses and types. Derivatives are financial instruments whose value is based on an underlying asset. They are used for hedging risk exposure and speculation. Common types of derivatives include futures, forwards, options, and swaps. Options give the buyer the right but not obligation to buy or sell an asset, while futures and forwards require the exchange of the asset. Swaps involve exchanging cash flows over time, such as interest rates or currencies.
Derivatives lecture3 & 4- futures
- Futures contracts call for delivery of an asset at a specified future date at an agreed price. The buyer takes a long position and commits to purchase the asset, while the seller takes a short position and commits to deliver the asset.
- Most futures contracts are settled financially rather than through physical delivery of the asset. They allow participants to hedge risk or speculate on price movements of underlying assets like commodities, financial instruments, and indexes.
- Basis risk arises from the uncertainty of the difference between the spot and futures price when closing out a hedge position. This can impact the effectiveness of hedges.
Topic 8 Managing Risk
The document discusses various financial instruments for hedging risks like interest rate, exchange rate, commodity price and quantity volatility. It describes forwards, futures, swaps and options contracts, how they can be used to hedge different types of risks, and their similarities and differences in terms of credit risk, standardization and cash flows.
Derivatives Primer
The document provides an overview of derivatives, including their definition, categories, and key types. It discusses forwards, futures, options, and how they are priced. Forwards involve a contractual obligation to buy or sell an asset at a fixed price on a future date. Futures are exchange-traded forwards that are standardized and involve a clearinghouse. Options give the holder the right, but not obligation, to buy or sell an asset at a preset price. Derivatives are priced based on the no-arbitrage principle to eliminate riskless profit opportunities.
Derivatives
The document discusses various derivatives instruments like forwards, futures, and options. Forwards are bilateral contracts where the underlying asset is delivered on maturity. Futures are exchange-traded standardized contracts that are cash settled daily. Options give the holder the right but not obligation to buy/sell the underlying at a strike price. Derivatives allow for hedging against price risks and speculating on market movements. They provide flexibility and leverage compared to trading the actual underlying assets.
VBA & ADO MS Access – Part 2
The document provides an introduction to derivatives markets. It defines derivatives as financial instruments whose value is derived from an underlying asset. It describes different types of derivatives including futures, forwards, options, and swaps. It explains how these derivatives can be used for hedging, speculation, and arbitrage. It also discusses major derivatives exchanges and over-the-counter markets.
Introduction to Derivatives Market
The document provides an introduction to derivatives markets. It defines derivatives as financial instruments whose value is derived from an underlying asset. Major classes of derivatives discussed include futures, forwards, options, and swaps. Futures contracts are standardized agreements to buy or sell an asset in the future. Forwards are similar but traded over-the-counter and non-standardized. Options provide the right to buy or sell the underlying asset. Swaps involve exchanging one set of cash flows for another. Derivatives are used for hedging risk, speculation, and arbitrage opportunities.
Unit 4 option pricing
This document discusses factors that affect option pricing and different types of options. The key factors that affect option pricing are the underlying asset price, expected volatility, strike price, time until expiration, interest rates, and dividends. The value of a call option increases when the underlying asset price increases, while the value of a put option decreases. European options can only be exercised at expiration, Bermudan options can be exercised at predefined intervals, and American options can be exercised at any time.
Buy Sell Agreements Example Slides
The document discusses key elements that should be addressed in buy-sell agreements between business owners. It highlights common issues like outdated fixed price agreements and lack of clarity around valuation processes. The document recommends that businesses adopt single appraiser agreements that select an appraiser upfront, establish an initial valuation, and require regular revaluations to ensure prices stay current over time. Having a well-defined valuation process is important to facilitate reasonable outcomes when ownership changes occur.
Basics of options
This document provides an overview of options basics, including: types of options (calls and puts), components (strike price, premium, intrinsic/time value), risk factors, and strategies (long/short calls and puts). It also defines key Greeks like delta, gamma, vega, and theta that measure an option's sensitivity to changes in the underlying asset price, volatility, and time to expiration.
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Factors affecting call and put option prices
- 1. FACTORS AFFECTING CALL & PUT OPTION PRICES..
- 2. 6 PRIMARY FACTORS 1. Underlying Price 2. Expected Volatility 3. Strike Price 4. Time Until Expiration 5. Interest Rate 6. Dividends
- 3. UNDERLYING PRICE Definition: The spot price of the underlying asset of a derivative
- 4. UNDERLYING PRICE If Underlying Prices Call Prices Will Put Prices Will Increase Increase Decrease Decrease Decrease Increase
- 5. EXPECTED VOLATILITY The greater the expected volatility, the higher the option value
- 6. STRIKE PRICE Defintion: The price at which a specific derivative contract can be exercised.
- 7. STRIKE PRICE Premiums increase as options become further in-the-money The premium generally decreases as the option becomes more out-of-the-money
- 8. TIME UNTIL EXPIRATION Definition: The time remaining until a financial contract expires. Also called time to maturity.
- 9. TIME UNTIL EXPIRATION The longer the time until expiration, the higher the option price The shorter the time until expiration, the lower the option price
- 10. INTEREST RATE If Interest Rates Call Prices Will Put Prices Will Rise Increase Decrease Fall Decrease Increase
- 11. DIVIDENDS If Dividends Call Prices Will Put Prices Will Rise Decrease Increase Fall Increase Decrease