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Chapter 10
1 C. Hull 2013
Fundamentals of Futures and Options Markets, 8th Ed, Ch 10, Copyright John
Notation
c : European call
option price
p : European put
option price
S0 : Stock price
today
K : Strike price
T : Life of option
: Volatility of stock
price
C : American Call
option price
P : American Put option
price
ST :Stock price at option
maturity
D : Present value of
dividends during options
life
r : Risk-free rate for
maturity T with cont.
comp.
Fundamentals of Futures and Options Markets, 8th Ed, Ch 10, Copyright John2 C. Hull 2013
r
D
?
+
+
+?
+
+
+
+
+
+
+
Fundamentals of Futures and Options Markets, 8th Ed, Ch 10, Copyright John3 C. Hull 2013
Fundamentals of Futures and Options Markets, 8th Ed, Ch 10, Copyright John4 C. Hull 2013
c=3
T=1
K = 18
Is
that
S0 = 20
r = 10%
D=0
Fundamentals of Futures and Options Markets, 8th Ed, Ch 10, Copyright John5 C. Hull 2013
c max(S0 Ke rT, 0)
Fundamentals of Futures and Options Markets, 8th Ed, Ch 10, Copyright John6 C. Hull 2013
p =1
0.5
K = 40
that
S0 = 37 T =
r =5%
D =0
Is
there an arbitrage
opportunity?
Fundamentals of Futures and Options Markets, 8th Ed, Ch 10, Copyright John7 C. Hull 2013
p max(Ke rT S0, 0)
Fundamentals of Futures and Options Markets, 8th Ed, Ch 10, Copyright John8 C. Hull 2013
Fundamentals of Futures and Options Markets, 8th Ed, Ch 10, Copyright John9 C. Hull 2013
Values of Portfolios
Portfolio A
ST > K
ST < K
ST K
Zero-coupon bond
Total
ST
K ST
Share
ST
ST
Total
ST
Call option
Fundamentals of Futures and Options Markets, 8th Ed, Ch 10, Copyright John10C. Hull 2013
They
Ke
-rT
c+
= p + S0
Fundamentals of Futures and Options Markets, 8th Ed, Ch 10, Copyright John11C. Hull 2013
Arbitrage Opportunities
Suppose
c =3
that
S0 = 31
T = 0.25
r = 10%
K =30
D=0
What are the arbitrage
possibilities when
p = 2.25 ?
p=1?
Fundamentals of Futures and Options Markets, 8th Ed, Ch 10, Copyright John12C. Hull 2013
Early Exercise
Usually
Fundamentals of Futures and Options Markets, 8th Ed, Ch 10, Copyright John13C. Hull 2013
An Extreme Situation
For
should you do if
Fundamentals of Futures and Options Markets, 8th Ed, Ch 10, Copyright John14C. Hull 2013
Fundamentals of Futures and Options Markets, 8th Ed, Ch 10, Copyright John15C. Hull 2013
Fundamentals of Futures and Options Markets, 8th Ed, Ch 10, Copyright John16C. Hull 2013
Fundamentals of Futures and Options Markets, 8th Ed, Ch 10, Copyright John17C. Hull 2013
S0
Fundamentals of Futures and Options Markets, 8th Ed, Ch 10, Copyright John18C. Hull 2013
S0
c max( S 0 D Ke
p max( D Ke
rT
rT
, 0)
S 0 , 0)
Fundamentals of Futures and Options Markets, 8th Ed, Ch 10, Copyright John19C. Hull 2013
American options; D = 0
S0 - K < C - P < S0 - Ke -rT
Equation 10.7 p. 243
Fundamentals of Futures and Options Markets, 8th Ed, Ch 10, Copyright John20C. Hull 2013