Option Valuation [CS Tanuj Saxena]



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Particulars

Remarks

 

1

Options

Options are financial instruments that carry right but not the obligations, to engage in future transactions on some underlying security at pre-agreed price.

 

2

Call Option

It provides holder the right to buy the underlyting asset at a fixed price, calles the stike price before the the expiration date of the option.

 

3

Put Option

A put option gives the buyer the right to sell the underlying asset at a fixed or strike price at any time prior to the expiration date of the option.

 

4

American Options

Option that can be exercised at any time till the expiration date. American option gives holder the right to exercise on to before the expiration date.

 

5

European Option

Option that can be excersied on the expitation date. It gives holder the right to excersie on expiration date. (Indian market follows European Options)

 

6

Intrinsic Value

It is the economic value of option if it is exercised immediately. If there is no positive economic value that will result from exercising it immediately, then the intrinsic value is zero.

 

7

In the money Option

An option is called "In the money" when the holder has the advantage in exercising the option.

 

8

Out of money Option

An option is called "Out the money" when the holder does not have the advantage in exercising the option.

 

9

At the money Option

the option is called "At the money" if holder does not lose or gain anything on excersing the option.

 

10

Binomial Model

 - Based on aasumption of perfectly efficient market

 - Based on no arbitrage assumption

 - Model can price the option at each point of a specified timeframe

 - Use for valuation of American Options

 - Useful for longer-dated options on securities with dividend payments

 

11

Black Scholes Model

 - Provide theoritical value of options

 - Use to value european options

 - It is a mathematical formula

 

12

Assumptions of Black Scholes Model

 - no transaction cost

 - Rf is known and constant

 - Market is efficient

 - no dividend or takeover during period under consideration

 - volatility of underlying share is known and constant

 

13

Monte carlo Simulation

 - First use by scientist working on atom bomb

 - Suitable for valuing american option

 - Applied only in cases requiring incorporation of multiple level of uncertainty in the inputs considered for the option valuation

 - Monte Carlo Simulation is probability Distribution

 

14

Steps in Monte Carlo Simulation

 - Generate large number of possible (but random) price paths for the underlying stock through the method of simulation

 - Calculate the respective payoff of the option for each path

 - Use these payoff to estimate the fair value of the option

 

15

Value of Options

Intrinsic Value of Option + Time value of Options

 

16

Options Delta / Hedge Ratio

Ratio of Spread of Possible Options Price to the Spread of Possible Share Price

 

17

Effects of Variable on Option Value

 

 

 

 

Call Value

Put Value

 

Increase in Stock Price

Increase

Decrease

 

Increase in Strike Price

Decrease

Increase

 

Increase in variance of underlying assets

Increase

Increase

 

Increase in time to expiration

Increase

Increase

 

Increase in interest rates

Increase

Decrease

 

Increase in dividend paid

Decrease

Increase

18

Three Mathematical Model

 - Operational Gaming

 - Monte Carlo

 - System Simulation

 

19

Options that do not have stock in portfolio to back up option 

Naked Options

 

20

Market Value of option out of money

Markter value Greater than zero  and intrinsic value zero

 

21

Movement of price or rise or fall in price is classified as

Binomial Lattice

 

22

If no alterations are made and the same inputs as a black-scholes model are, and when using a sufficient number of steps, the results of binomial model and black scholes model will be

Identical

 

23

Types of Options Markets

 - American Option

 - European Option

 - Covered Options

 

24

Expected volatility of underlying asset is known as 

Sigma

 

#SPILL!

Particulars

Remarks

 

24.78616

Options

Options are financial instruments that carry right but not the obligations, to engage in future transactions on some underlying security at pre-agreed price.

 

25.4899

Call Option

It provides holder the right to buy the underlyting asset at a fixed price, calles the stike price before the the expiration date of the option.

 

26.19364

Put Option

A put option gives the buyer the right to sell the underlying asset at a fixed or strike price at any time prior to the expiration date of the option.

 

26.89739

American Options

Option that can be exercised at any time till the expiration date. American option gives holder the right to exercise on to before the expiration date.

 

27.60113

European Option

Option that can be excersied on the expitation date. It gives holder the right to excersie on expiration date. (Indian market follows European Options)

 

28.30487

Intrinsic Value

It is the economic value of option if it is exercised immediately. If there is no positive economic value that will result from exercising it immediately, then the intrinsic value is zero.

 

29.00861

In the money Option

An option is called "In the money" when the holder has the advantage in exercising the option.

 

29.71235

Out of money Option

An option is called "Out the money" when the holder does not have the advantage in exercising the option.

 

30.41609

At the money Option

the option is called "At the money" if holder does not lose or gain anything on excersing the option.

 

31.11984

Binomial Model

 - Based on aasumption of perfectly efficient market

 - Based on no arbitrage assumption

 - Model can price the option at each point of a specified timeframe

 - Use for valuation of American Options

 - Useful for longer-dated options on securities with dividend payments

 

31.82358

Black Scholes Model

 - Provide theoritical value of options

 - Use to value european options

 - It is a mathematical formula

 

32.52732

Assumptions of Black Scholes Model

 - no transaction cost

 - Rf is known and constant

 - Market is efficient

 - no dividend or takeover during period under consideration

 - volatility of underlying share is known and constant

 

33.23106

Monte carlo Simulation

 - First use by scientist working on atom bomb

 - Suitable for valuing american option

 - Applied only in cases requiring incorporation of multiple level of uncertainty in the inputs considered for the option valuation

 - Monte Carlo Simulation is probability Distribution

 

33.9348

Steps in Monte Carlo Simulation

 - Generate large number of possible (but random) price paths for the underlying stock through the method of simulation

 - Calculate the respective payoff of the option for each path

 - Use these payoff to estimate the fair value of the option

 

34.63855

Value of Options

Intrinsic Value of Option + Time value of Options

 

35.34229

Options Delta / Hedge Ratio

Ratio of Spread of Possible Options Price to the Spread of Possible Share Price

 

36.04603

Effects of Variable on Option Value

 

 

36.74977

 

Call Value

 

37.45351

Increase in Stock Price

Increase

 

38.15725

Increase in Strike Price

Decrease

 

38.861

Increase in variance of underlying assets

Increase

 

39.56474

Increase in time to expiration

Increase

 

40.26848

Increase in interest rates

Increase

 

40.97222

Increase in dividend paid

Decrease

 

41.67596

Three Mathematical Model

 - Operational Gaming

 - Monte Carlo

 - System Simulation

 

42.37971

Options that do not have stock in portfolio to back up option 

Naked Options

 

43.08345

Market Value of option out of money

Markter value Greater than zero  and intrinsic value zero

 

43.78719

Movement of price or rise or fall in price is classified as

Binomial Lattice

 

44.49093

If no alterations are made and the same inputs as a black-scholes model are, and when using a sufficient number of steps, the results of binomial model and black scholes model will be

Identical

 

45.19467

Types of Options Markets

 - American Option

 - European Option

 - Covered Options

 

45.89841

Expected volatility of underlying asset is known as 

Sigma

 

#SPILL!

Particulars

Remarks

 

46.60216

Options

Options are financial instruments that carry right but not the obligations, to engage in future transactions on some underlying security at pre-agreed price.

 

47.3059

Call Option

It provides holder the right to buy the underlyting asset at a fixed price, calles the stike price before the the expiration date of the option.

 

48.00964

Put Option

A put option gives the buyer the right to sell the underlying asset at a fixed or strike price at any time prior to the expiration date of the option.

 

48.71338

American Options

Option that can be exercised at any time till the expiration date. American option gives holder the right to exercise on to before the expiration date.

 

49.41712

European Option

Option that can be excersied on the expitation date. It gives holder the right to excersie on expiration date. (Indian market follows European Options)

 

50.12087

Intrinsic Value

It is the economic value of option if it is exercised immediately. If there is no positive economic value that will result from exercising it immediately, then the intrinsic value is zero.

 

50.82461

In the money Option

An option is called "In the money" when the holder has the advantage in exercising the option.

 

51.52835

Out of money Option

An option is called "Out the money" when the holder does not have the advantage in exercising the option.

 

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