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Finance Chpt 9

Options

QuestionAnswer
Call Option Right to buy an asset (e.g., stock) at a specified exercise price (also called strike price) on or before the exercise date. Call options are worth more when the exercise price is lower; puts are worth more when the exercise price is higher.
Call option - Stock Price at Expiration vs Value of Call at Expiration If the stock price at expiration is greater than exercise price then the value of call at expiration is stock price (exercise price). If the stock price at expiration is less than the exercise price, the value of call at expiration is 0.
Put Option Right to sell an asset at a specified exercise price on or before the exercise date.
Put option - Stock Price at Expiration vs Value of Call at Expiration If the stock price at expiration is greater than exercise price then the value of call at expiration is 0. If the stock price at expiration is less than the exercise price, the value of call at expiration is stock price (exercise price).
Option Value The value of an option at expiration is a function of the stock price and the exercise price.
Components of the Option Price 1 - Underlying stock price 2 - Striking or Exercise price 3 - Volatility of the stock returns (standard deviation of annual returns) 4 - Time to option expiration 5 - Time value of money (discount rate)
Executive Stock Options Long term call options given to executives as part of their compensation package.
Warrants Right to buy shares from a company at a stipulated price before a set date.
Convertible Bond Bond that the holder may exchange for a specific number of shares.
Callable Bond Bond that may be repurchased by the issuer before maturity at specified call price.
Created by: wguate