1. McGraw-Hill/Irwin © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. Options Markets CHAPTER 14

2. 14-2 Option Terminology Buy - Long Sell - Short CallPut Key Elements –Exercise or Strike Price –Premium or Price –Maturity or Expiration

3. 14-3 Market and Exercise Price Relationships In the Money - exercise of the option would be profitable 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 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 At the Money - exercise price and asset price are equal

4. 14-4 Figure 14-1 Options on IBM June 7, 2004

5. 14-5 American vs European Options American - the option can be exercised at any time before expiration or maturity 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 European - the option can only be exercised on the expiration or maturity date

6. 14-6 Different Types of Options Stock Options Index Options Futures Options Foreign Currency Options Interest Rate Options

7. 14-7 Figure 14-2 Index Options

8. 14-8 Payoffs and Profits on Options at Expiration - CallsNotation Stock Price = S T Exercise Price = X Stock Price = S T Exercise Price = X Payoff to Call Holder ( S T - X) if S T >X ( S T - X) if S T >X 0if S T < X 0if S T < X Profit to Call Holder Payoff - Purchase Price

9. 14-9 Payoffs and Profits on Options at Expiration - Calls Payoff to Call Writer - ( S T - X) if S T >X 0if S T < X 0if S T < X Profit to Call Writer Payoff + Premium

10. 14-10 Figure 14-3 Payoff and Profit to Call at Expiration

11. 14-11 Figure 14-4 Payoff and Profit to Call Writers at Expiration

12. 14-12 Payoffs and Profits at Expiration - Puts Payoffs to Put Holder 0if S T > X (X - S T ) if S T < X Profit to Put Holder Payoff - Premium

13. 14-13 Payoffs and Profits at Expiration - Puts Payoffs to Put Writer 0if S T > X -(X - S T )if S T < X Profits to Put Writer Payoff + Premium

14. 14-14 Figure 14-5 Payoff and Profit to Put Option at Expiration

15. 14-15 Equity, Options & Options Plus T-Bills - Text Example InvestmentStrategyInvestment Equity onlyBuy stock @ 90100 shares$9,000 Options onlyBuy calls @ 10900 options$9,000 Calls PlusBuy calls @ 10100 options $1,000 T-BillsBuy T-bills @ 2% $8,000 Yield

16. 14-16 Equity, Options & Options Plus T-Bills - Text Example IBM Stock Price $85$100$110 All Stock$8,500$10,000$11,000 All Options$0$9,000$18,000 Lev Equity $8,160$9,160 $10,160

17. 14-17 Equity, Options & Options Plus T-Bills - Text Example IBM Stock Price $85 $100$110 $85 $100$110 All Stock-5.56% 11.11% 22.22% All Options-100% 0%100% Lev Equity -9.93% 1.78%12.89%

18. 14-18 Figure 14-6 Returns to Three Strategies

19. 14-19 Option Strategies Protective Put Covered Call Long Stock Long Stock Long Put Short Call Straddle Bullish Spread Long CallLong Call Low Ex. Long PutShort Call High Ex.

20. 14-20 Table 14-1 Payoff to Protective Put Strategy

21. 14-21 Figure 14-7 Value of Protective Put Position at Maturity

22. 14-22 Figure 14-8 Protective Put Versus Stock Investment (at-the-money put)

23. 14-23 Table 14-2 Payoff to a Covered Call

24. 14-24 Figure 14-9 Value of a Covered Call Position at Expiration

25. 14-25 Table 14-3 Payoff to a Straddle

26. 14-26 Figure 14-10 Payoff and Profit to a Straddle Position at Expiration

27. 14-27 Table 14-4 Payoff to a Bullish Spread

28. 14-28 Figure 14-11 Value of a Bullish Spread Position at Expiration

29. 14-29 Optionlike Securities Callable Bonds Convertible Securities Warrants Collateralized Loans Levered Equity and Risky Debt

30. 14-30 Figure 14-12 Value of Callable Bonds Compared with Straight Bonds

31. 14-31 Figure 14-13 Value of a Convertible Bond as a Function of Stock Price

32. 14-32 Figure 14-4 Collateralized Loan

33. 14-33 Exotic Options Asian Options Barrier Options Lookback Options Currency-Translated Options Binary Options