1. Investments, 8 th edition Bodie, Kane and Marcus Slides by Susan Hine McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. CHAPTER 20 Options Markets: Introduction

2. 20-2 Buy - Long Sell - Short Call Put Key Elements –Exercise or Strike Price –Premium or Price –Maturity or Expiration Option Terminology

3. 20-3 In the Money - exercise of the option would be profitable Call: market price>exercise price Put: exercise price>market price Out of the Money - exercise of the option would not be profitable Call: market price<exercise price Put: exercise price<market price At the Money - exercise price and asset price are equal Market and Exercise Price Relationships

4. 20-4 Figure 20.1 Stock Options on IBM

5. 20-5 American - the option can be exercised at any time before expiration or maturity European - the option can only be exercised on the expiration or maturity date American vs. European Options

6. 20-6 Stock Options Index Options Futures Options Foreign Currency Options Interest Rate Options Different Types of Options

7. 20-7 Notation Stock Price = S T Exercise Price = X Payoff to Call Holder (S T - X) if S T >X 0if S T < X Profit to Call Holder Payoff - Purchase Price Payoffs and Profits at Expiration - Calls

8. 20-8 Payoff to Call Writer - (S T - X) if S T >X 0if S T < X Profit to Call Writer Payoff + Premium Payoffs and Profits at Expiration - Calls

9. 20-9 Figure 20.2 Payoff and Profit to Call Option at Expiration

10. 20-10 Figure 20.3 Payoff and Profit to Call Writers at Expiration

11. 20-11 Payoffs to Put Holder 0if S T > X (X - S T ) if S T < X Profit to Put Holder Payoff - Premium Payoffs and Profits at Expiration - Puts

12. 20-12 Payoffs to Put Writer 0if S T > X -(X - S T )if S T < X Profits to Put Writer Payoff + Premium Payoffs and Profits at Expiration – Puts Continued

13. 20-13 Figure 20.4 Payoff and Profit to Put Option at Expiration

14. 20-14 InvestmentStrategyInvestment Equity onlyBuy stock @ 100100 shares$10,000 Options onlyBuy calls @ 101000 options$10,000 LeveragedBuy calls @ 10100 options $1,000 equityBuy T-bills @ 3% $9,000 Yield Equity, Options & Leveraged Equity

15. 20-15 IBM Stock Price $95$105$115 All Stock$9,500$10,500$11,500 All Options$0 $5,000$15,000 Lev Equity $9,270 $9,770$10,770 Equity, Options Leveraged Equity - Payoffs

16. 20-16 IBM Stock Price $95$105$115 All Stock-5.0%5.0% 15% All Options-100% -50% 50% Lev Equity -7.3%-2.3% 7.7% Rates of Return

17. 20-17 Figure 20.5 Rate of Return to Three Strategies

18. 20-18 Table 20.1 Value of Protective Put Portfolio at Option Expiration

19. 20-19 Figure 20.6 Value of a Protective Put Position at Option Expiration

20. 20-20 Figure 20.7 Protective Put versus Stock Investment (at-the-money option)

21. 20-21 Table 20.2 Value of a Covered Call Position at Expiration

22. 20-22 Figure 20.8 Value of a Covered Call Position at Expiration

23. 20-23 Straddle (Same Exercise Price) Long Call and Long Put Spreads - A combination of two or more call options or put options on the same asset with differing exercise prices or times to expiration. Vertical or money spread: Same maturity Different exercise price Horizontal or time spread: Different maturity dates Option Strategies

24. 20-24 Table 20.3 Value of a Straddle Position at Option Expiration

25. 20-25 Figure 20.9 Value of a Straddle at Expiration

26. 20-26 Table 20.4 Value of a Bullish Spread Position at Expiration

27. 20-27 Figure 20.10 Value of a Bullish Spread Position at Expiration

28. 20-28 If the prices are not equal arbitrage will be possible Put Call Parity

29. 20-29 Stock Price = 110 Call Price = 17 Put Price = 5 Risk Free = 5% Maturity = 1 yr X = 105 117 > 115 Since the leveraged equity is less expensive, acquire the low cost alternative and sell the high cost alternative Put Call Parity - Disequilibrium Example

30. 20-30 Table 20.5 Arbitrage Strategy

31. 20-31 Optionlike Securities Callable Bonds Convertible Securities Warrants Collateralized Loans

32. 20-32 Figure 20.11 Values of Callable Bonds Compared with Straight Bonds

33. 20-33 Figure 20.12 Value of a Convertible Bond as a Function of Stock Price

34. 20-34 Figure 20.13 Collateralized Loan

35. 20-35 Figure 20.14 Return on Indexed Linked CD

36. 20-36 Table 20.6 Prices of Digital Options on Initial Jobless Claims

37. 20-37 Figure 20.15 Implied Probability of Jobless Claims Derived from Traded Digital Options

38. 20-38 Exotic Options Asian Options Barrier Options Lookback Options Currency Translated Options Digital Options