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4. Defining Options and Their Valuation Options Options and Corporate Finance > Options Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance?campaign_content=book_192_section_118&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=di rect&utm_source=boundless

5. An option that conveys the right to buy something at a specific price is called a call; an option that conveys the right to sell something at a specific price is called a put. Today, many options are created in a standardized form and traded through clearinghouses on regulated options exchanges, while other over-the-counter options are written as bilateral, customized contracts between a single buyer and seller. The most common options are European, which may only be exercised on expiration, and American, may be exercised on any trading day on or before expiration. Nearly all stock and equity options are American options, while indexes are generally represented by European options. Defining Options and Their Valuation Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/options-and-corporate-finance-16/options-118/defining-options-and-their- valuation-496- 5677?campaign_content=book_192_section_118&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boun dless European Call Surface View on Boundless.com Options and Corporate Finance > Options

6. Free to share, print, make copies and changes. Get yours at www.boundless.com Appendix

7. Key terms in the money For a call option, when the option's strike price is below the market price of the underlying asset. For a put option, when the strike price is above the market price of the underlying asset. out of the money A call option with a strike price that is higher than the market price of the underlying asset, or a put option with a strike price that is lower than the market price of the underlying asset. stochastic Random, randomly determined, relating to stochastics. Free to share, print, make copies and changes. Get yours at www.boundless.com Options and Corporate Finance

8. Valuation of a Call Option Where: N is the cumulative distribution function of the standard normal distribution; T - t is the time to maturity; S is the spot price of the underlying asset; K is the strike price; r is the risk free rate; and omega is the volatility of returns of the underlying asset. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikipedia. "Black–Scholes." GNU FDL http://en.wikipedia.org/wiki/Black%25E2%2580%2593Scholes View on Boundless.comGNU FDLhttp://en.wikipedia.org/wiki/Black%25E2%2580%2593ScholesView on Boundless.com Options and Corporate Finance

9. European Call Surface A European call valued using the Black-Scholes pricing equation for varying asset price S and time-to-expiry T. In this particular example, the strike price is set to unity, the risk-free rate is 0.04 and the volatility is 0.2. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikipedia. "European Call Surface." GNU FDL http://en.wikipedia.org/wiki/File:European_Call_Surface.png View on Boundless.comGNU FDLhttp://en.wikipedia.org/wiki/File:European_Call_Surface.pngView on Boundless.com Options and Corporate Finance

10. Value of a Put Option Where: N is the cumulative distribution function of the standard normal distribution; T - t is the time to maturity; S is the spot price of the underlying asset; K is the strike price; r is the risk free rate; and omega is the volatility of returns of the underlying asset. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikipedia. "Black–Scholes." GNU FDL http://en.wikipedia.org/wiki/Black%25E2%2580%2593Scholes View on Boundless.comGNU FDLhttp://en.wikipedia.org/wiki/Black%25E2%2580%2593ScholesView on Boundless.com Options and Corporate Finance

11. Free to share, print, make copies and changes. Get yours at www.boundless.com Options and Corporate Finance A company issues an option that can only be exercised prior to expiration on three specific days that are defined in the contract. What type of option is this? A) A European option. B) A Bermudan option. C) An American option. D) An Asian option.

12. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Options and Corporate Finance A company issues an option that can only be exercised prior to expiration on three specific days that are defined in the contract. What type of option is this? A) A European option. B) A Bermudan option. C) An American option. D) An Asian option.

13. Free to share, print, make copies and changes. Get yours at www.boundless.com Options and Corporate Finance Which of the following factors influences the value of an option? A) All of these answers. B) The strike price of the option. C) The cost of holding a position in the underlying security, including interest and dividends. D) The time until expiration.

14. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Options and Corporate Finance Which of the following factors influences the value of an option? A) All of these answers. B) The strike price of the option. C) The cost of holding a position in the underlying security, including interest and dividends. D) The time until expiration.

15. Attribution Wikipedia. "Black–Scholes." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Black%25E2%2580%2593ScholesCC BY-SA 3.0http://en.wikipedia.org/wiki/Black%25E2%2580%2593Scholes Wikipedia. "Derivative (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Derivative_(finance)CC BY-SA 3.0http://en.wikipedia.org/wiki/Derivative_(finance) Wikipedia. "Option (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Option_(finance)CC BY-SA 3.0http://en.wikipedia.org/wiki/Option_(finance) Wiktionary. "stochastic." CC BY-SA 3.0 http://en.wiktionary.org/wiki/stochasticCC BY-SA 3.0http://en.wiktionary.org/wiki/stochastic Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/out-of-the-moneyCC BY-SA 3.0http://www.boundless.com//finance/definition/out-of-the-money Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/in-the-moneyCC BY-SA 3.0http://www.boundless.com//finance/definition/in-the-money Free to share, print, make copies and changes. Get yours at www.boundless.com Options and Corporate Finance