2007 Page 1 F. MICHAUX CORPORATE FINANCE Financial and Real Options.
-
Upload
sybil-kelley -
Category
Documents
-
view
222 -
download
4
Transcript of 2007 Page 1 F. MICHAUX CORPORATE FINANCE Financial and Real Options.
2007
Page 1F. MICHAUX
CORPORATE FINANCE Financial and Real Options
2007
Page 2F. MICHAUX
GENERAL AGENDA
Financial and Real Options
2007
Page 3F. MICHAUX
TOPICS COVERED
• Calls, Puts and Shares• Financial Alchemy with Options• What Determines Option Value• Option Valuation• Real Options
– Follow Up Investments– Abandon– Wait– Vary Output or Production
• Binomial Model
2007
Page 4F. MICHAUX
OPTION TERMINOLGY
Call Option
Right to buy an asset at a specified exercise price on or before the exercise date.
Put Option
Right to sell an asset at a specified exercise price on or before the exercise date.
2007
Page 5F. MICHAUX
Buyer Seller
Call option Right to buy asset Obligation to sell asset
Put option Right to sell asset Obligation to buy asset
OPTION OBLIGATIONS
2007
Page 6F. MICHAUX
The value of an option at expiration is a function of the stock price and the exercise
price.
OPTION VALUE
2007
Page 7F. MICHAUX
• The value of an option at expiration is a function of the stock price and the exercise price.
Example - Option values given a exercise price of $85
00051525ValuePut
25155000Value Call
110100908070$60eStock Pric
OPTION VALUE
2007
Page 8F. MICHAUX
Call option value (graphic) given a $85 exercise price.
Share Price
Cal
l opt
ion
valu
e
85 105
$20
OPTION VALUE
2007
Page 9F. MICHAUX
Put option value (graphic) given a $85 exercise price.
Share Price
Put
opt
ion
valu
e
80 85
$5
OPTION VALUE
2007
Page 10F. MICHAUX
Call option payoff (to seller) given a $85 exercise price.
Share Price
Cal
l opt
ion
$ pa
yoff
85
OPTION VALUE
2007
Page 11F. MICHAUX
Put option payoff (to seller) given a $85 exercise price.
Share Price
Put
opt
ion
$ pa
yoff
85
OPTION VALUE
2007
Page 12F. MICHAUX
Protective Put - Long stock and long put
Share Price
Pos
itio
n V
alue
Long Stock
OPTION VALUE
2007
Page 13F. MICHAUX
Protective Put - Long stock and long put
Share Price
Pos
itio
n V
alue
Long Put
OPTION VALUE
2007
Page 14F. MICHAUX
Protective Put - Long stock and long put
Share Price
Pos
itio
n V
alue Protective Put
Long Put
Long Stock
OPTION VALUE
2007
Page 15F. MICHAUX
Protective Put - Long stock and long put
Share Price
Pos
itio
n V
alue Protective Put
OPTION VALUE
2007
Page 16F. MICHAUX
Straddle - Long call and long put
- Strategy for profiting from high volatility
Share Price
Pos
itio
n V
alue Long call
OPTION VALUE
2007
Page 17F. MICHAUX
Straddle - Long call and long put
- Strategy for profiting from high volatility
Share Price
Pos
itio
n V
alue
Long put
OPTION VALUE
2007
Page 18F. MICHAUX
Straddle - Long call and long put
- Strategy for profiting from high volatility
Share Price
Pos
itio
n V
alue
Straddle
OPTION VALUE
2007
Page 19F. MICHAUX
Straddle - Long call and long put
- Strategy for profiting from high volatility
Share Price
Pos
itio
n V
alue
Straddle
OPTION VALUE
2007
Page 20F. MICHAUX
Strip – 1 Long call and 2 long put
- Strategy for profiting from high volatility
Share Price
Pos
itio
n V
alue Long call
OPTION VALUE
2007
Page 21F. MICHAUX
Strip – 1 Long call and 2 long put
- Strategy for profiting from high volatility
Share Price
Pos
itio
n V
alue
2 Long put
OPTION VALUE
2007
Page 22F. MICHAUX
Strip – 1 Long call and 2 long put
- Strategy for profiting from high volatility
Share Price
Pos
itio
n V
alue
Strip
OPTION VALUE
2007
Page 23F. MICHAUX
Strip – 1 Long call and 2 long put
- Strategy for profiting from high volatility
Share Price
Pos
itio
n V
alue
Strip
OPTION VALUE
2007
Page 24F. MICHAUX
Strap – 2 Long call and 1 long put
- Strategy for profiting from high volatility
Share Price
Pos
itio
n V
alue 2 Long call
OPTION VALUE
2007
Page 25F. MICHAUX
Strap – 2 Long call and 1 long put
- Strategy for profiting from high volatility
Share Price
Pos
itio
n V
alue
Long put
OPTION VALUE
2007
Page 26F. MICHAUX
Strap – 2 Long call and 1 long put
- Strategy for profiting from high volatility
Share Price
Pos
itio
n V
alue
Strap
OPTION VALUE
2007
Page 27F. MICHAUX
Strap – 2 Long call and 1 long put
- Strategy for profiting from high volatility
Share Price
Pos
itio
n V
alue
Strap
OPTION VALUE
2007
Page 28F. MICHAUX
Upper Limit
Stock Price
OPTION VALUE
2007
Page 29F. MICHAUX
Upper Limit
Stock Price
Lower Limit
(Stock price - exercise price) or 0whichever is higher
OPTION VALUE
2007
Page 30F. MICHAUX
Components of the Option Price1 - Underlying stock price
2 - Striking or Exercise price
3 - Volatility of the stock returns (standard deviation of annual returns)
4 - Time to option expiration
5 - Time value of money (discount rate)
OPTION VALUE
2007
Page 31F. MICHAUX
Black-Scholes Option Pricing ModelBlack-Scholes Option Pricing Model
OC = Ps[N(d1)] - S[N(d2)]e-rt
OPTION VALUE
04/19/23 2007
Page 32F. MICHAUX
OC = Ps[N(d1)] - S[N(d2)]e-rt
OC- Call Option Price
Ps - Stock Price
N(d1) - Cumulative normal density function of (d1)
S - Strike or Exercise price
N(d2) - Cumulative normal density function of (d2)
r - discount rate (90 day comm paper rate or risk free rate)
t - time to maturity of option (as % of year)
v - volatility - annualized standard deviation of daily returns
Black-Scholes Option Pricing ModelBlack-Scholes Option Pricing Model
04/19/23 2007
Page 33F. MICHAUX
(d1)=
ln + ( r + ) tPs
S
v2
2
v t
32 34 36 38 40
N(d1)=
Black-Scholes Option Pricing ModelBlack-Scholes Option Pricing Model
04/19/23 2007
Page 34F. MICHAUX
(d1)=
ln + ( r + ) tPs
S
v2
2
v t
Cumulative Normal Density FunctionCumulative Normal Density Function
(d2) = d1 - v t
04/19/23 2007
Page 35F. MICHAUX
CALL OPTION
Example
What is the price of a call option given the following?
P = 36 r = 10% v = .40
S = 40 t = 90 days / 365
04/19/23 2007
Page 36F. MICHAUX
(d1) =
ln + ( r + ) tPs
S
v2
2
v t
(d1) = - .3070 N(d1) = 1 - .6206 = .3794
Example
What is the price of a call option given the following?
P = 36 r = 10% v = .40
S = 40 t = 90 days / 365
CALL OPTION
04/19/23 2007
Page 37F. MICHAUX
(d2) = - .5056
N(d2) = 1 - .6935 = .3065
(d2) = d1 - v t
Example
What is the price of a call option given the following?
P = 36 r = 10% v = .40
S = 40 t = 90 days / 365
CALL OPTION
04/19/23 2007
Page 38F. MICHAUX
OC = Ps[N(d1)] - S[N(d2)]e-rt
OC = 36[.3794] - 40[.3065]e - (.10)(.2466)
OC = $ 1.70
Example
What is the price of a call option given the following?
P = 36 r = 10% v = .40
S = 40 t = 90 days / 365
CALL OPTION
04/19/23 2007
Page 39F. MICHAUX
Intrinsic Value
OPTION TO WAIT
Option Price
Stock Price
04/19/23 2007
Page 40F. MICHAUX
Intrinsic Value + Time Premium = Option Value
Time Premium = Vale of being able to wait
Option Price
Stock Price
OPTION TO WAIT
04/19/23 2007
Page 41F. MICHAUX
More time = More value
Option Price
Stock Price
OPTION TO WAIT