2-1 2.5 Derivative Markets Derivative Asset/Contingent Claim Security with payoff that depends on the price of other securities Listed Call Option Right.

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Presentation transcript:

Derivative Markets Derivative Asset/Contingent Claim Security with payoff that depends on the price of other securities Listed Call Option Right to buy an asset at a specified price on or before a specified expiration date Listed Put Option Right to sell an asset at a specified exercise price on or before a specified expiration date

2-2 Figure 2.9 Stock Options on Apple

Derivative Markets Using the Stock Options on Apple The right to buy 100 shares of stock at a stock price of $355 using the July contract would cost $560 (ignoring commissions) Is this contract “in the money”? When should you buy this contract? Stock price was equal to $357.20; you will make money if stock price increases above $ $5.60 = $ by contract expiration

Derivative Markets Using the Stock Options on Apple The right to buy 100 shares of stock at a stock price of $355 using the July contract would cost $90 (ignoring commissions) Is this contract “in the money”? Why do the two option prices differ?

Derivative Markets Using the Stock Options on Apple Look at Figure 2.9 to answer the following questions How does the exercise or strike price affect the value of a call option? A put option? Why? How does a greater time to contract expiration affect the value of a call option? A put option? Why? How is “volume” different from “open interest”?

Derivative Markets Futures Contracts Purchaser (long) buys specified quantity at contract expiration for set price Contract seller (short) delivers underlying commodity at contract expiration for agreed- upon price Futures: Future commitment to buy/sell at preset price Options: Holder has future right to buy/sell

2-7 Figure 2.10 Futures Contracts Corn futures prices in the Chicago Board of Trade, July 8, 2011

Derivative Markets Corn futures prices in the Chicago Board of Trade, July 8, 2011 Contract size: 5,000 bushels of corn Price quote for Dec. 12 contract: 614’0 translates to a price of $ /8 cent per bushel, or $6.14 If you bought the Dec. 12 contract, what are you agreeing to do? Purchase 5,000 bushels of corn in December for 5,000 × $6.14 = $30,700 What is your obligation if you sell the Dec. 12 contract? How does this contract differ from an option?

Derivative Markets Derivatives Securities Options Basic Positions Call (Buy/Sell?) Put (Buy/Sell?) Terms Exercise price Expiration date Futures Basic Positions Long (Buy/Sell?) Short (Buy/Sell?) Terms Delivery date Deliverable item