MGT339H5 Lecture Notes - Lecture 3: Montreal Exchange, Corporate Finance, Strike Price
Document Summary
Holder obtains a long position and writer holds a short position. Writer receives payment upfront and may need to deliver an asset to the holder if circumstances dictate that. Writer has an obligation if the holder exercise the right. Option - give the holder the right to buy or sell an underlying asset for a specified period of time before maturity. Equity option - gives the holder the right to buy or sell shares for a specified price over a given period of time. Call options - you have the right to buy the option at an underlying price. Put options - you can sell the right to buy the option. Relevance to corporate finance is to mitigate risk exposure. More risk increases premium for the option. Intrinsic value - difference between the price of the underlying asset and the strike price. Increases when asset price increases and vice versa.
