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Chapter 27 – Options

Chapter 27 – Options. BA 543 Financial Markets and Institutions. Chapter 27 – Options Markets. What was the embedded cost in the Futures Contract for a hedger? What would be the preferred set-up for a hedger? Avoid the bad prices Enjoy the good prices

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Chapter 27 – Options

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  1. Chapter 27 – Options BA 543 Financial Markets and Institutions

  2. Chapter 27 – Options Markets • What was the embedded cost in the Futures Contract for a hedger? • What would be the preferred set-up for a hedger? • Avoid the bad prices • Enjoy the good prices • Who would be willing to take the other side of the contract? • What economic incentive would you need to offer? • Does this sound like Insurance?

  3. Chapter 27 – Options Markets • The payoff profile desired for producer Get Fixed Price during Falling Prices, Get Market during Rising Prices

  4. Chapter 27 – Options Markets • An options contract fits the “bill” • Two types of options, • Call Option – The right but not the obligation to buy • Put Option – The right but not the obligation to sell • It takes two to make a contract • Buyer of the option • Seller (Writer) of the option

  5. Chapter 27 – Options Markets • What are the characteristics of an option contract? • The agreed to underlying (remember this is a derivative asset) • The agreed to price for transaction in the future (here it is the strike or exercise price) • The time horizon for the option (maturity date) • The payment to the seller or writer for providing the contract option to the buyer • Styles, American or European

  6. Chapter 27 – Options Markets • Just the Basics of the Call Option • Buyer’s options: exercise or do nothing • Seller’s obligation: perform • Pay-off Profile • Just the Basics of the Put Option • Buyer’s options: exercise or do nothing • Seller’s obligation: perform • Pay-off Profile • Just like Insurance (you have an option)

  7. Chapter 27 – Options Markets • U.S. Markets and the Underlying Assets • Stock Options • Started Call Options at CBOE in 1973 • Put Options not granted until 1977 • Markets not very broad until early 80s • Options Clearing Corporation (OCC) • Stock Index Options • Started in February 1982 with Value Line Index on the Kansas City Board of Trade (1675 stocks) • First at CBOE was the S&P 100

  8. Chapter 27 – Options Markets • U.S. Markets and the Underlying Assets (continued) • LEAPS (Long-term Equity Anticipation Securities) • Stock and Index Options with maturities up to 39 months • Spans the market as typical stock and index options only out 6 months • Interest Rate Options • Options on physicals • Options on Futures

  9. Chapter 27 – Options Markets • Option Varieties • FLEX • Exotic • Etc. • International Option Exchanges • Options on Futures • Mechanics • Popularity • Pricing of Options

  10. Chapter 29 – Applications • Applications - Insurance • Futures Applications • Options Applications • Applications – Speculative • Futures • Options Strategies • Covered Call Writing • Protective Put • Straddles • Spreads

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