This document provides an overview of options and their valuation. It defines key terms like calls, puts, exercise price, underlying asset, and premium. It describes the differences between European and American options and possibilities at expiration like in-the-money, out-of-the-money, and at-the-money. The document outlines the payoffs of call and put options at expiration. It also discusses options trading in India, index options, and combinations of options and shares. Finally, it introduces models for option valuation, including the binomial tree approach and the Black-Scholes model.
Portfolio revision, securities, New securities, existing securities, purchases and sales of securities, maximizing the return, minimizing the risk, Transaction cost, Taxes, Statutory stipulations, Intrinsic difficulty, commission and brokerage, push up transaction costs, reducing the gains, constraint, Taxes, capital gains, long-term capital, lower rate, Frequent sales, short-term capital gains, investment companies, constraints, established, objectives, skill, resources and time, substantial adjustments, mispriced, excess returns, heterogeneous expectations, better estimates, generate excess returns, market efficiency, little incentive, predetermined rules, changes in the securities market, Performance measurement, Performance evaluation, superior or inferior, small investors, better performance, prompt liquidity, comparative performance, purchase and sale of securities.
Portfolio revision, securities, New securities, existing securities, purchases and sales of securities, maximizing the return, minimizing the risk, Transaction cost, Taxes, Statutory stipulations, Intrinsic difficulty, commission and brokerage, push up transaction costs, reducing the gains, constraint, Taxes, capital gains, long-term capital, lower rate, Frequent sales, short-term capital gains, investment companies, constraints, established, objectives, skill, resources and time, substantial adjustments, mispriced, excess returns, heterogeneous expectations, better estimates, generate excess returns, market efficiency, little incentive, predetermined rules, changes in the securities market, Performance measurement, Performance evaluation, superior or inferior, small investors, better performance, prompt liquidity, comparative performance, purchase and sale of securities.
Derivatives are the financial instruments whosevalue is derived from the underlying assets.
•
It is called derivatives as its value is derived fromother assets called underlying asset.
•
It is a contract that derives its value from changes inthe price of the underlying asset.
Example1:
The value of a gold futures contract is derived fromthe value of the underlying asset i.e. Gold.
This ppt is prepared to provide detailed information regarding Forwards and Futures contracts of Derivatives the topics covered under this are Meaning of Forwards contracts, Underlying Assets of Forwards contracts, FEATURES OF FORWARD CONTRACTS, Tailored made, Why Forwards contracts, FUTURES CONTRACT, What is A Futures Contract, Characteristics of Futures contracts, Mechanism of Trading in Futures Market, Margin requirement, Marking-to-market (M2M), SETTLING A FUTURE POSITION, OFFSETTING, CASH DELIVERY, by Sundar, Assistant Professor of commerce.
Subscribe to Vision Academy for Video assistance
https://www.youtube.com/channel/UCjzpit_cXjdnzER_165mIiw
Want to understand how options work but don\'t have time to go through books? Read this presentation I prepared with couple of my classmates for a case study in Advanced Finance at AIM
Derivatives are the financial instruments whosevalue is derived from the underlying assets.
•
It is called derivatives as its value is derived fromother assets called underlying asset.
•
It is a contract that derives its value from changes inthe price of the underlying asset.
Example1:
The value of a gold futures contract is derived fromthe value of the underlying asset i.e. Gold.
This ppt is prepared to provide detailed information regarding Forwards and Futures contracts of Derivatives the topics covered under this are Meaning of Forwards contracts, Underlying Assets of Forwards contracts, FEATURES OF FORWARD CONTRACTS, Tailored made, Why Forwards contracts, FUTURES CONTRACT, What is A Futures Contract, Characteristics of Futures contracts, Mechanism of Trading in Futures Market, Margin requirement, Marking-to-market (M2M), SETTLING A FUTURE POSITION, OFFSETTING, CASH DELIVERY, by Sundar, Assistant Professor of commerce.
Subscribe to Vision Academy for Video assistance
https://www.youtube.com/channel/UCjzpit_cXjdnzER_165mIiw
Want to understand how options work but don\'t have time to go through books? Read this presentation I prepared with couple of my classmates for a case study in Advanced Finance at AIM
JIMS Rohini News - Introduction to Derivatives by Mr. N.P. Singh (Associate Professor - JIMS Rohini Sector 5) - PGDM Programme . Derivatives are defined as contracts which derive their value from an underlying asset.
- Stock
- Index
- Commodity
- Currency
- Interest Rate or
- Any other asset
Jagan Institute of Management Studies has evolved as an institution of excellence and commitment in the field of Management and Technical education. The institute from the very outset focused on professional studies at the Post- Graduate level with a view to tap, direct and channelize the enormous talent pool in the country. We offer Post Graduate Diploma in Management (PGDM) (two year - Full Time and three year - Part Time).
DETERMING CASH FLOWS FOR INVESTING ANALYSISPANKAJ PANDEY
Show the conceptual difference between profit and cash flow.
Discuss the approach for calculating incremental cash flows.
Highlight the interaction between financing and investment decisions.
Real Options, Investment Analysis and Process PANKAJ PANDEY
Understand the capital budgeting process:
Document the policies and practices of companies in India and compare them with that of the companies in developed countries.
Understand the linkage between corporate strategy and investment decisions.
Define strategic real options.
Show the valuation of real options.
Discuss the methods of estimating beta.
Explain the market model for calculating beta.
Examine the difference between betas of individual firms and the industry beta.
Highlight the beta instability.
Explain the determinants of beta.
Show the use of beta in determining the cost of equity.
Explain the general concept of opportunity cost of capital.
Distinguish between the project cost of capital and the firm’s cost of capital.
Learn about the methods of calculating component cost of capital and the weighted average cost of capital.
Understand the concept and calculation of the marginal cost of capital.
Recognise the need for calculating cost of capital for divisions.
Understand the methodology of determining the divisional beta and divisional cost of capital.
Illustrate the cost of capital calculation for a real company.
Random Walks, Efficient Markets & Stock PricesNEO Empresarial
The famous financial theory of Efficient Markets is associated with the idea of a Random Walk. If the theory holds true, that makes prices unpredictable, and therefore it'd be impossible to consistently beat the market.
The seminar discusses the mathematical idea of a random walk, then moves on to understand what makes a market efficient.
Finally, we conduct a Monte Carlo Simulation on Wolfram Mathematica, to forecast the behaviour of Google's stock price one year from now.
Explain the concept of financial leverage.
Discuss the alternative measures of financial leverage.
Understand the risk and return implications of financial leverage.
Analyse the combined effect of financial and operating leverage.
Highlight the difference between operating risk and financial risk.
Risk and Return: An Overview of Capital Market Theory PANKAJ PANDEY
Discuss the concepts of average and expected rates of return.
Define and measure risk for individual assets.
Show the steps in the calculation of standard deviation and variance of returns.
Explain the concept of normal distribution and the importance of standard deviation.
Compute historical average return of securities and market premium.
Determine the relationship between risk and return.
Highlight the difference between relevant and irrelevant risks.
Show the application of the NPV rule in the choice between mutually exclusive projects, replacement decisions, projects with different lives etc.
Understand the impact of inflation on mutually exclusive projects with unequal lives.
Make choice between investments under capital rationing.
Illustrate the use of linear programming under capital rationing situation.
Discuss the concept of risk in investment decisions.
Understand some commonly used techniques, i.e., payback, certainty equivalent and risk-adjusted discount rate, of risk analysis in capital budgeting.
Focus on the need and mechanics of sensitivity analysis and scenario analysis.
Highlight the utility and methodology simulation analysis.
Explain the decision tree approach in sequential investment decisions.
Focus on the relationship between utility theory and capital budgeting decisions.
Understand the nature and importance of investment decisions.
Distinguish between discounted cash flow (DCF) and non-discounted cash flow (non-DCF) techniques of investment evaluation.
Explain the methods of calculating net present value (NPV) and internal rate of return (IRR).
Show the implications of net present value (NPV) and internal rate of return (IRR).
Describe the non-DCF evaluation criteria: payback and accounting rate of return and discuss the reasons for their popularity in practice and their pitfalls.
Illustrate the computation of the discounted payback.
Describe the merits and demerits of the DCF and Non-DCF investment criteria.
Compare and contract NPV and IRR and emphasise the superiority of NPV rule.
Risk and Return: Portfolio Theory and Assets Pricing ModelsPANKAJ PANDEY
Discuss the concepts of portfolio risk and return.
Determine the relationship between risk and return of portfolios.
Highlight the difference between systematic and unsystematic risks.
Examine the logic of portfolio theory .
Show the use of capital asset pricing model (CAPM) in the valuation of securities.
Explain the features and modus operandi of the arbitrage pricing theory (APT).
Introduction
Why big data is required
Big data
Big data facts
Big data 3 V’s
Why big data is important
Examples where big data is used
Analytics
Approach to analytic development
Analysis of data through senser.
Analytics can help in
Big data analytics
Big data analytics in practice
How big data is used in twitter to get patterns
Human resource cost and risk of big data.
Big data analytics tools and technology
Conclusions
references
Unit 8 - Information and Communication Technology (Paper I).pdfThiyagu K
This slides describes the basic concepts of ICT, basics of Email, Emerging Technology and Digital Initiatives in Education. This presentations aligns with the UGC Paper I syllabus.
Acetabularia Information For Class 9 .docxvaibhavrinwa19
Acetabularia acetabulum is a single-celled green alga that in its vegetative state is morphologically differentiated into a basal rhizoid and an axially elongated stalk, which bears whorls of branching hairs. The single diploid nucleus resides in the rhizoid.
Read| The latest issue of The Challenger is here! We are thrilled to announce that our school paper has qualified for the NATIONAL SCHOOLS PRESS CONFERENCE (NSPC) 2024. Thank you for your unwavering support and trust. Dive into the stories that made us stand out!
A Strategic Approach: GenAI in EducationPeter Windle
Artificial Intelligence (AI) technologies such as Generative AI, Image Generators and Large Language Models have had a dramatic impact on teaching, learning and assessment over the past 18 months. The most immediate threat AI posed was to Academic Integrity with Higher Education Institutes (HEIs) focusing their efforts on combating the use of GenAI in assessment. Guidelines were developed for staff and students, policies put in place too. Innovative educators have forged paths in the use of Generative AI for teaching, learning and assessments leading to pockets of transformation springing up across HEIs, often with little or no top-down guidance, support or direction.
This Gasta posits a strategic approach to integrating AI into HEIs to prepare staff, students and the curriculum for an evolving world and workplace. We will highlight the advantages of working with these technologies beyond the realm of teaching, learning and assessment by considering prompt engineering skills, industry impact, curriculum changes, and the need for staff upskilling. In contrast, not engaging strategically with Generative AI poses risks, including falling behind peers, missed opportunities and failing to ensure our graduates remain employable. The rapid evolution of AI technologies necessitates a proactive and strategic approach if we are to remain relevant.
Model Attribute Check Company Auto PropertyCeline George
In Odoo, the multi-company feature allows you to manage multiple companies within a single Odoo database instance. Each company can have its own configurations while still sharing common resources such as products, customers, and suppliers.
This slide is special for master students (MIBS & MIFB) in UUM. Also useful for readers who are interested in the topic of contemporary Islamic banking.
2. 2Financial Management, Ninth
Options
An option is a contract that gives the holder a
right, without any obligation, to buy or sell an
asset at an agreed price on or before a
specified period of time.
The option to buy an asset is known as a call
option.
The option to sell an asset is called a put
option.
3. 3Financial Management, Ninth
Options
The price at which option can be exercised is
called an exercise price or a strike price.
The asset on which the put or call option is
created is referred to as the underlying
asset.
The option premium is price that the holder
of an option has to pay for obtaining a call or
a put option.
4. 4Financial Management, Ninth
When an Option can be Exercised
European option When an option is allowed
to be exercised only on the maturity date, it is
called a European option.
American option When the option can be
exercised any time before its maturity, it is
called an American option.
5. 5Financial Management, Ninth
Possibilities at Expiration
In-the-money A put or a call option is said to
in-the-money when it is advantageous for the
investor to exercise it.
Out-of-the-money A put or a call option is
out-of-the-money if it is not advantageous for
the investor to exercise it.
At-the-money When the holder of a put or a
call option does not lose or gain whether or
not he exercises his option.
6. 6Financial Management, Ninth
Call Option
Buy a call option
You should exercise call option when:
Share price at expiration > Exercise price.
Do not exercise call option when:
Share price at expiration < Exercise price.
The value of the call option at expiration is:
Value of call option at expiration = Maximum
[Share price – Exercise price, 0].
The expression above indicates that the value of a
call option at expiration is the maximum of the
share price minus the exercise price or zero.
The call buyer’s gain is call seller’s loss.
7. 7Financial Management, Ninth
Put Option
Buy a put option
Exercise the put option when:
Exercise price > Share price at expiration.
Do not exercise the put option when:
Exercise price < Share price at expiration.
The value or payoff of a put option at expiration
will be:
Value of put option at expiration = Maximum
[Exercise price – Share price at expiration, 0].
The put option buyer’s gain is the seller’s
loss.
8. 8Financial Management, Ninth
Options Trading in India
The Security Exchange Board of India (SEBI)
has announced a list of 31 shares for the
stock-based option trading from July 2002.
SEBI selected these shares for option trading
on the basis of the following criteria:
Shares must be among the top 200 in terms
of market capitalisation and trading volume.
Shares must be traded in at least 90 per cent
of the trading days.
9. 9Financial Management, Ninth
Options Trading in India
The non-promoter holding should be at least
30 per cent and the market capitalisation of
free-float shares should be Rs 750 crore.
The six-month average trading volume in the
share in the underlying cash market should
be a minimum of Rs 5 crore.
The ratio of daily volatility of the share vis-à-
vis the daily volatility of the index should not
be more than four times at any time during
the previous six months.
10. 10Financial Management, Ninth
Options Trading in India
The minimum size of the contract is Rs 2
lakh. For the first six months, there would be
cash settlement in options contracts and
afterwards, there would be physical
settlement. The option sellers will have to pay
the margin, but the buyers will have to only
pay the premium in advance. The stock
exchanges can set limits on exercise price.
11. 11Financial Management, Ninth
Index Options
Index options are call or put options on the
stock market indices. In India, there are
options on the Bombay Stock Exchange
(BSE)—Sensex and the National Stock
Exchange (NSE)—Nifty.
12. 12Financial Management, Ninth
Index Options
The Sensex options are European-type
options and expire on the last Thursday of the
contract month. The put and call index option
contracts with 1-month, 2-month and 3-month
maturity are available. The settlement is done
in cash on a T + 1 basis and the prices are
based on expiration price as may be decided
by the Exchange. Option contracts will have a
multiplier of 100.
The multiplier for the NSE Nifty Options is
200 with a minimum price change of Rs 10
(200 × 0.05).
13. 13Financial Management, Ninth
Combinations of Put, Call and Share
Protective Put: Combination of a Share and a
Put
Protective Put vs. Call
Put-Call Parity
Covered Calls: Buying a Share and Selling a
Call
fr t
S P C E e
−
+ = +
14. 14Financial Management, Ninth
Combinations of Put, Call and Share
Straddle: Combining Call and Put at Same
Exercise Price
Strips and Straps
Strangle: Combining Call and Put at Different
Exercise Prices
Spread: Combining Put and Call at Different
Exercise Prices
Spread: Combining the Long and Short
Options
Collars
15. 15Financial Management, Ninth
Factors Determining Option Value
1. Exercise price and the share (underlying asset)
price
2. Volatility of returns on share
3. Time to expiration
4. Interest rates
16. 16Financial Management, Ninth
Limitations of DCF Approach
The DCF approach does not work for options
because of the difficulty in determining the
required rate of return of an option. Options
are derivative securities. Their risk is
derived from the risk of the underlying
security. The market value of a share
continuously changes. Consequently, the
required rate of return to a stock option is
also continuously changing. Therefore, it is
not feasible to value options using the DCF
technique.
17. 17Financial Management, Ninth
Model for Option Valuation
Simple binomial tree approach to option
valuation.
Black-Scholes option valuation model.
18. 18Financial Management, Ninth
Simple Binomial Tree Approach
Sell a call option on the share. We can create
a portfolio of certain number of shares (let us
call it delta, ∆) and one call option by going
long on shares and short on options that
there is no uncertainty of the value of portfolio
at the end of one year.
Formula for determining the option delta,
represented by symbol ∆, can be written as
follows:
Option Delta = Difference in option Values /
Difference in Share Prices.
19. 19Financial Management, Ninth
Simple Binomial Tree Approach
The value of portfolio at the end of one year
remains same irrespective of the increase or
decrease in the share price.
Since it is a risk-less portfolio, we can use the
risk-free rate as the discount rate:
PV of Portfolio = Value of Portfolio at end of year /
Discount rate
20. 20Financial Management, Ninth
Simple Binomial Tree Approach
Since the current price of share is S, the value
of the call option can be found out as follows:
Value of a call option = No. of Shares (∆) Spot
Price – PV of Portfolio
The value of the call option will remain the same
irrespective of any probabilities of increase or
decrease in the share price. This is so because
the option is valued in terms of the price of the
underlying share, and the share price already
includes the probabilities of its rise or fall.
21. 21Financial Management, Ninth
Risk Neutrality
Investors are risk-neutral. They would simply
expect a risk-free rate of return. In our
example, the share price could rise by 100 per
cent (from Rs 150 to Rs 300) or it could fall by
33.3 per cent (from Rs 150 to Rs 100). Under
these situations, a risk-neutral investor’s return
from the investment in the share is given in
box.
22. 22Financial Management, Ninth
Risk Neutrality
We can utilise this information to determine the
value of the call option at the end of the year. The
call option is worth Rs 100 when the share price
increases to Rs 300, and its worth is zero if the
share price declines. We can thus calculate the
value of the call option at the end of one year as
given below:
Value of call option at the end of the period
= 0.325´ 100 + (1 – 0.352)´ 0 = Rs 32.50
Current value of the call option
= 32.5/1.1 = Rs 29.55
Expected return (probability of price increase) percentage increase in price
(1 probability of price increase) percentage decrease in price risk-free rate
100 (1 ) ( 33.33) 10
0.325
p p
p
= ×
+ − × =
= × + − × − =
=
23. 23Financial Management, Ninth
Black and Scholes Model for Option
Valuation
The B–S model is based on the following
assumptions:
The rates of return on a share are log
normally distributed.
The value of the share (the underlying asset)
and the risk-free rate are constant during the
life of the option.
The market is efficient and there are no
transaction costs and taxes.
There is no dividend to be paid on the share
during the life of the option.
24. 24Financial Management, Ninth
Black and Scholes Model for Option
Valuation
The B–S model is as follows:
where
C0 = the current value of call option
S0 = the current market value of the share
E = the exercise price
e = 2.7183, the exponential constant
rf = the risk-free rate of interest
t = the time to expiration (in years)
N(d1) = the cumulative normal probability density
function
0 0 1 2( ) ( )fr t
C S N d E e N d
−
= −
25. 25Financial Management, Ninth
Black and Scholes Model for Option
Valuation
where
ln = the natural logarithm;
σ = the standard deviation;
σ2
= variance of the continuously
compounded annual return on the share.
2
1
2 1
ln( / ) / 2fS E r t
d
t
d d t
σ
σ
σ
+ + =
= −
26. 26Financial Management, Ninth
Features of B–S Model
Black–Scholes model has two features-
The parameters of the model, except the share
price volatility, are contained in the agreement
between the option buyer and seller.
In spite of its unrealistic assumptions, the
model is able to predict the true price of option
reasonably well.
The model is applicable to both European
and American options with a few adjustments.
27. 27Financial Management, Ninth
Option’s Delta or Hedge Ratio
The hedge ratio is a tool that enables us to
summarise the overall exposure of portfolios of
options with various exercise prices and
maturity periods.
An option’s hedge ratio is the change in the
option price for a Re 1 increase in the share
price.
A call option has a positive hedge ratio and a
put option has a negative hedge ratio.
Under the Black–Scholes option valuation
formula, the hedge ratio of a call option is
N (d1) and the hedge ratio for a put is N (d1) – 1.
28. 28Financial Management, Ninth
Dividend-Paying Share Option
We can use slightly modified
B–S model for this purpose. The share price
will go down by an amount reflecting the
payment of dividend. As a consequence, the
value of a call option will decrease and the
value of a put option will increase.
We also need to adjust the volatility in case of
a dividend-paying share since in the B–S
model it is the volatility of the risky part of the
share price. This is generally ignored in
practice.
29. 29Financial Management, Ninth
Ordinary Share as an Option
The limited liability feature provides an
opportunity to the shareholders to default on
a debt.
The debt-holders are the sellers of call option
to the shareholders. The amount of debt to be
repaid is the exercise price and the maturity
of debt is the time to expiration.
The shareholders’ option can be interpreted
as a put option. The shareholders can sell
(hand-over) the firm to the debt-holders at
zero exercise price if they do not want to
make the payment that is due.