8.1 Properties of Stock Option Prices Chapter 8 Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 8.1 Properties of Stock Option Prices Chapter 8
8.2 Notation C: European call C: American Call option option price prIce P: European put P: American Put option option price price So: Stock price today T: Stock price at option °K: Strike price maturity ·T: Life of option D: Present value of Volatility of stock dividends during options ife orIce Risk-free rate for maturity T with cont comp Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 8.2 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 option’s life • r : Risk-free rate for maturity T with cont comp
Effect of Variables on Option Pricing (table8.1, page 168) Variable c P 十 KTor +一?++一 P—+?+一+ 十 D 十 Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 8.3 Effect of Variables on Option Pricing (Table 8.1, page 168) Variable c p C P S0 K T r D + + – + ? ? + + + + + + + – + – – – – + – + – +
8.4 American vs European Options An American option is worth at least as much as the corresponding european option P≥ Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 8.4 American vs European Options An American option is worth at least as much as the corresponding European option C c P p
Calls: An arbitrage 8.5 Opportunity? Suppose that =3 So=20 T=1 r=10% K=18 D=0 Is there an arbitrage opportunity? Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull Calls: An Arbitrage 8.5 Opportunity? • Suppose that c = 3 S0 = 20 T = 1 r = 10% K = 18 D = 0 • Is there an arbitrage opportunity?