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Chapter 13

BUSI 2402U Chapter Notes - Chapter 13: Call Option, London Underground Standard Stock, Chicago Board Options Exchange


School
UOIT
Department
Business
Course Code
BUSI 2402U
Professor
Dr.K.Smimou
Chapter
13

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CHAPTER 13: Risk and the Pricing of Options
Option Basics
Financial Option a contract that gives its owner the right (but not the obligation) to
purchase or sell an asset at a fixed price at some future date.
Call Option a financial option that gives its owner the right to buy an asset.
Put Option a financial option that gives its owner the right to sell an asset.
Option Writer the seller of and originator of an option contract, who is the person
who takes the other side of the contract. For every owner of a financial option, there is
also an option writer.
Derivatives securities whose cash flows depend solely on the prices of other marketed
assets.
The most common option contracts are options on shares of stock. A stock option gives
the holder the option to buy or sell a share of stock on or before a given date for a given
price. For example, a call option on Telus stock might give the holder the right to
purchase a share of Telus for $75/share at any time up to, for example, Jan 15/2018.
Similarly, a put option on Telus stock might give the holder the right to sell a share of
Telus stock for $70/share at any time up to, for example, Feb 19/2018.
Warrant a call option written by a company itself on new stock. A warrant is identical
to a call option.
Opinion Contracts
Exercising the Option when the holder of an option enforces the agreement and buys
or sells a share of stock at the agreed-upon price.
Strike Price/Exercise Price the price at which an option holder buys or sells a share of
stock when the option is exercised.
American Options the most common kind of option, which allow the holder to
exercise the option on any date up to an including the expiration date.
European Options allow their holders to exercise the option only on the expiration
date and not before.
The terms American and European have nothing to do with the location where the
options are traded both types are traded worldwide.
Expiration Date the last date on which an option holder has the right to exercise the
option.
Options can be bought and sold. Standard stock options are traded on organized
exchanges, while more specialized options are sold through dealers.
The oldest and largest options exchange is the Chicago Board Options Exchange (CBOE).
By convention, all traded options expire on the Saturday following the third Friday of
the month.
The market price of the option is also called the option premium.
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