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Lecture 5

FINA 410 Lecture Notes - Lecture 5: Dividend Yield, Implied Volatility, AutocorrelationPremium

3 pages85 viewsSummer 2017

Course Code
FINA 410
Jean Mayer

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Chapter 5: pp 87- 90 and 95-99
The value of any asset is derived from the PV of CF form that asset, this is the only
exception to the rule and must have these 2 characteristics:
o 1) the assets derive their value from other assets
o 2) The CF’s o the assets are cotiget o the occurrece of specific eets
USING DCF would understate their value.
Basics of Option Pricing
Options gives you the right, not the obligation, to buy or sell underlying asset at a
predetermined (strike) price
o two positions in options: long (buyer) or short (seller)
American options can be excercised at any time, European options only at expiration
o American options more valuable but also harder to value
o The value of an option is determined by 6 variables relating to the underlying asset and
financial markets:
o 1) Current value of the underlying asset:
o underlying increases call increases, put decreases
o 2) Volatility of the underlying asset:
o volatility increases call and put increase
o 3)Dividends paid on the underlying asset:
o dividends increase underlying decreases call decreases, put increases
o 4) Strike price of the option:
o strike increases call decreases, put increases
o 5) Time to expiration on the option:
o time decreases call and put decrease
o 6) Riskless interest rate corresponding to life of the option:
o interest increases PV (strike) is cheaper call increase and put decrease
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