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Lecture

ADMS 4503 Lecture Notes - Option Style, Risk-Free Interest Rate, S&P 500 Index


Department
Administrative Studies
Course Code
ADMS 4503
Professor
Nabil Tahani

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LECTURE 6
An option is a right to buy ( call)/ to sell (put) the underlying asset
Styles:
- European e.g S&P 500
- American
Asian options:
Lookback options: you look at the history of the stock for estimating the pay off.
Options pay off
long call
K = $100, T = 1 year, Premium c = $10
pay off
ST K
-10 K = 100 110 ST
So that pay off = max (ST K , 0)
Short call:
pay off
-10 110
K = 100
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Long put
Pay off
60
55
55 60 ST
Pay off = max ( k - ST , 0)
Short put
45
55
K = 60
-55
-60
In the money/ out of money/ instrinsic value
- An in the money option is an option that pays off immediately
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