Lecture Managerial finance - Chapter 9: Financial options and applications in corporate finance
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Chapter 9
Financial Options and
Applications in Corporate
Finance
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Topics in Chapter
Financial Options
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What is a financial option?
An option is a contract which gives its
holder the right, but not the obligation,
to buy (or sell) an asset at some
predetermined price within a specified
period of time.
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What is the single most important
characteristic of an option?
It does not obligate its owner to take
any action. It merely gives the owner
the right to buy or sell an asset.
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Option Terminology
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.
5
Option Terminology
Strike (or exercise) price: The price
stated in the option contract at which
the security can be bought or sold.
Option price: The market price of the
option contract.
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Option Terminology
(Continued)
Expiration date: The date the option
matures.
Exercise value: The value of a call
option if it were exercised today =
Current stock price Strike price.
Note: The exercise value is zero if the
stock price is less than the strike price.
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Option Terminology
(Continued)
Covered option: A call option written
against stock held in an investor’s
portfolio.
Naked (uncovered) option: An option
sold without the stock to back it up.
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Option Terminology
(Continued)
Inthemoney call: A call whose strike
price is less than the current price of the
underlying stock.
Outofthemoney call: A call option
whose strike price exceeds the current
stock price.
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