Beruflich Dokumente
Kultur Dokumente
CHAPTER 7 VALUATION
LEARNING OBJECTIVES
2
The Call Option Seller's Pay-off at Pay-off of the call option seller
Expiration
Put Option
14
An investor hopes that the price of BHELs share will fall after
three months. Therefore, he purchases a put option on BHELs
share with a maturity of three months at a premium of Rs 5.
The exercise price is Rs 30. The current market price of
BHELs share is Rs 28. How much is profit or loss of the put
buyer and the put seller if the price of the share at the time of
the maturity of the option turns out to be Rs 18, or Rs 25, or
Rs 28, or Rs 30, or Rs 40?
16
Example
The Put Option Holder's Pay-off at Pay-off for a put option buyer
Expiration
Example
17
The Put Option Seller's Pay-off at Pay-off for the put option seller
Expiration
Options Trading in India
18
The minimum size of the contract is Rs 2 lakh. For the first six
months, there would be cash settlement in options contracts
and afterwards, there would be physical settlement. The
option sellers will have to pay the margin, but the buyers will
have to only pay the premium in advance. The stock
exchanges can set limits on exercise price.
Index Options
21
Example
Suppose the current share price and the exercise
price to be Rs 100, and possible share prices at
expiration Rs 90 or Rs 110. The pay-off (value)
of a portfolio of a share (long) and a put (long) at
expiration is
Value of share
Current share
price
Share price
Protective Put
25
Curre nt share
price
Share price
Exerci se pric e
Protective Put vs. Call
26
Suppose you buy a share (long position), buy a put (long position) and sell
a call (short). The current share price is Rs 100 and the exercise price of
put and call options is the same, that is, Rs 100. Both put and call options
are European type options and they will expire after three months. Let us
further assume that there are two possible share prices after three months:
Rs 110 or Rs 90. What is the value of your portfolio?
Strips Straps
Strangle: Combining Call and Put at Different
34
Exercise Prices
A strangleis a portfolio of a put and a call with the
same expiration date but with different exercise
prices. The investor will combine an out-of-the-
money call with an out-of-the-money put.
Example
35
The figure below shows graphically the effect of the volatility of the underlying
asset on the value of a call option. The underlying assets in the example are share
of two companiesBrightways and Jyotipath. Both shares have same exercise
price and same expected value at expiration. However, Jyotipaths share has more
risk since its prices have large variation. It also has higher chances of having higher
prices over a large area as compared to Brightways share. The greater is the risk of
the underlying asset, the greater is the value of an option.
The value of a call option will increase with the rising interest
rate since the present value of the exercise price will fall.
ln ( S / E ) rf 2 / 2 t
d1
t
d 2 d1 t
where
ln = the natural logarithm;
= the standard deviation;
2 = variance of the continuously
compounded annual return on the share.
Features of BS Model
64
The market value of debt is : Market value of debt= Value of firm value
of equity
= 250 200 = Rs 50 crore.