FIN 4414 Lecture Notes - Lecture 13: Real Options Valuation, Call Option

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taupedolphin629

15 Mar 2017

School

University of Florida

Department

Finance, Insurance and Real Estate

Course

FIN 4414

Professor

Ray Sugata

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Document Summary

It is a contract that gives its holder the right, but not the obligation, to buy/sell an asset at some predetermined price within a specified period of time: keep in mind . It does not obligate the owner to take an action. It just gives the owner the right/option to buy or sell an asset: call option. An option to buy a specified number of shares of a security within some future period: put option. An option to sell a specified number of shares of a security within some future period: exercise/strike price. The price stated in the option contract which the security can be bought or sold: option price. Option contract"s market price: expiration date. The date the option matures: exercise value. The value of an option if it were exercised today. > current stock price strike price: covered option. An option written against stock held in an investor"s portfolio: naked/uncovered option.

Related Questions

I. Fill in the blank using a number of terms listed below (@1 point). Annuity due, Asset Mgmt ratio, Call, Comparisons, Comparative ratio analysis, Corporation, Covered, Current Ratio, DSO, Du Pont Equation , Equal, Future performance, Greater, Higher, In-the-money, Less, Liquidity, Lower, Option, Ordinary Annuity, Out-of-the-money, Percentage, Perpetuity, Put, PV, Quick, Reduced, TIE, TATO, Trend Analysis, Writer 11. The payment or receipt of equal amounts, at the end of a series of equal periods, for a specified amount of time is called a(n) _______________. 12. When a loan is amortized over a five year term, the amount of interest paid is ________________ each year. 13. You have just won a $5 million lottery to be received in twenty annual equal payments of $250,000. What will happen to the present value of your winnings if the interest rate increases? It will be worth _________________. 14. The more frequent the compounding the _________________ the effective interest rate. 15. More frequent compounding results in _______________ future values and _______________ present values than less frequent compounding at the same nominal interest rate. 16. A(n) _______________ is a financial instrument that agrees to pay an equal amount of money per period into the indefinite future (i.e. forever). 17. A(n) _________________ is a contract which gives its holder the right to buy(or sell) an asset at some predetermined price within a specified period of time. 18. The seller of an option is called the option __________________. 19. An investor who writes call options against stock held in his or her portfolio is said to be selling _______________ options. 20. When the exercise price exceeds the current stock price, a call option is said to be _____________________; however, when the exercise price is less than the current price of the underlying stock, a call option is _________________. 21. An option which gives you the right to sell a stock at a specified price within some future period is called a(n) ______________ option.

A (American) call option gives the owner of the option the __________ to ______________ a specified number of shares of stock _____, at a specified price.

a. obligation; sell; for a particular period of time right;

b. sell; on a specified future date obligation; c.

buy; for a particular period of time right;

d.buy; on a specified future date right;

e. buy; for a particular period of time

QUESTION 10

Which of the following is NOT generally considered an advantage of transitioning a firm from a private business to a public corporation, despite the time and expense required to do so?

		a. the original founders of the firm can use some funds raised in the IPO to diversify their own investments
	b.	it establishes a firm market value for the firm, since the going price per share is now public information
	c.	it reduces the firm's cost of raising additional capital in the future, because the the stock will be more liquid
		d. it reduces the firm's cost of raising additional capital in the future because everyone knows how much of their OWN money the founders are investing in the firm (how much "skin in the game" they have)
		e. all of the above are advantages of going public

QUESTION 11

An increase in depreciation expense will ______________ a firm's net income and ___________ the firm's (net) cash flow. Assume that both NI and (net) cash flow both start and finish above $0.00.

		a. decrease, decrease
		b. decrease, increase
	c.	increase, decrease
d.		increase, increase

Problem 2

The writer of a regular exchange-listed put-option on a stock:

Has the right to buy 100 shares of the underlying stock at the market price.

Has the right to sell 100 shares of the underlying stock at the exercise price.

Has the obligation to buy 100 shares of the underlying stock at the exercise price.

Has the obligation to sell 100 shares of the underlying stock at the exercise price.

Has the obligation to buy 100 shares of the underlying stock at the market price.

please really need some help with these questions

Problem 3

Suppose an investor have a put option. What will happen if the stock price on the exercise date is below the exercise price?

A. The seller will need to deliver stock to the owner of the option. B. The seller will be obliged to buy stock from the owner of the option. C. The owner will not exercise his option.
D. The option will extend for nine more months.
E. None of the above options.

Problem 5

Suppose an investor sells one share of stock and buys a call option on the stock. What will be the value of her investment on the final exercise date if the stock price is above the exercise price? (Ignore transaction costs.)

A. The value of two shares of stock.
B. The value of one share of stock plus the exercise price. C. The exercise price.
D. The value of one share of stock minus the exercise price.

E. None of the above options.

Problem 9

All else equal, as the underlying stock price decreases:

A. The put price increases.
B. The put price decreases.
C. The call price increases.
D. There is no effect on put price.
E. The put price can either increase, decrease, or remain the same.

Problem 10

All else equal, as the underlying stock volatility decreases:

A. The put price increases.
B. The put price decreases.
C. The call price increases.
D. There is no effect on put price.
E. The put price can either increase, decrease, or remain the same.

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FIN 4414 Lecture Notes - Lecture 13: Real Options Valuation, Call Option

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