COMMERCE 2FA3 Chapter Notes - Chapter 5: Dividend Discount Model, Call Option, Option Style

• School: McMaster University
• Department: Commerce
• Course: COMMERCE 2FA3
• Professor: Richard Deaves

Document Summary

Preferred shares have fixed dividends that normally must be declared and paid before common shareholders. Call option right to buy at a specific price up to some specific date. Put option right to sell at a specific price up to some specific date. Strike price the price a which the purchase or sale can occur. Si(cid:374)(cid:272)e sto(cid:272)k(cid:859)s (cid:272)u(cid:396)(cid:396)e(cid:374)t p(cid:396)i(cid:272)e is g(cid:396)eate(cid:396) than the strike price. A call option with strike price of . Stocks current price is less than the strike price. The (cid:373)o(cid:396)e ti(cid:373)e the(cid:396)e is, the g(cid:396)eate(cid:396) the likelihood a(cid:374) out of the (cid:373)o(cid:374)ey optio(cid:374) (cid:449)ill go (cid:858)a(cid:271)o(cid:448)e (cid:449)ate(cid:396)(cid:859) The more time there is, the greater the likelihood an in the money option will go deeper in the money it can eventually go. European options can only be exercised at expiry. American options can be exercised any time prior to expiry. Intrinsic value diffe(cid:396)e(cid:374)(cid:272)e (cid:271)et(cid:449)ee(cid:374) the u(cid:374)de(cid:396)lyi(cid:374)g(cid:859)s p(cid:396)i(cid:272)e a(cid:374)d the strike price.