Ch. 24
Which one of the following describes the intrinsic value of a put option?
Greater of the strike price minus the stock price or zero
In the money
S1 > exercise price
out of the money
S1 ends up being below the exercise price on the experation date, then the call option is work zero
Excercising the option
act of buying or selling the underlying asset via the option contract
When warrants are exercised, the:
earnings per share decrease.
Put option
the right to sell an asset at a fixed price Investor who sells a put option receives cash up front and is then obligated to buy the asset at the exercise price if the otion holder demands it
Which one of the following statements concerning convertible bonds is false?
A convertible bond should always be worth less than a comparable straight bond.
Which one of the following will decrease the value of an American call option?
A decrease in the value of the underlying security
Assume you purchase one call option contract on a stock that is currently selling for $12 per share. What is the maximum amount you can lose?
The option premium per share
Call option
The risk to buy an asset at a fixed price An investor that sells a call option receives money up front and has the obligation to sell the asset at the exercise price if the option holder wants it
option
a contract that gives its owner the right to buy or sell some asset at a fixed price on or before a given date
Warrant
a security that gives the holder the right to purchase shares of stock at a fixed price over a given period of time, similar to call options, however have much longer periods that call options
Employee Stock Option (ESO)
an option granted to an employee by a company giving the employee the right to buy shares of stock in the company at a fixed price for a fixed time, powerful motivator!
Conversible bond
bond that can be exchanged for a fixed number of shares of stock for a specificed amount of time
When you purchase insurance you are in essence:
buying a put option.
conversion premium
difference between the conversion price and the current stock price, divided by the current stock price
conversion price
dollar amount of a bond's par value that is exchangeable for one share of stock
what is zero sum game
either the buyer or seller loses of wins, never both
investment timing decision
evaluation of the optimal time to begin a project
present value of exercise price on option equation
exercise price / (1 + risk free rate)
A call option will always sell
for no more than the underlying asset
Correlation between stock price and call worth
higher stock price (S0) means higher call worth
correlation between risk free rate and call worth
higher the risk free rate, the more the call is worth
Contigency planning - option to expand
includes increasing production or improving cash flow by raising the product's price
Contigency planning - option to scale back (abandon)
involves selling off some capacity or putting it to another use
Contigency planning - option to suspend or contract operations
involves temporarily shutting down an activity of some sort and its particlarly valuable in natual resource extraction
expiration date
last day on which an option may be exercised
managerial options
opportunities that managers can exploit if certain things happen in the future, ways in which the poduct is prices, advertised, etc.
american option
option that may be exercised at any time until its expiration date
European option
option that may be exercised only on the expiration date
Strategic options
options for future, related business products or strategies
Valuing the option to wait:
requires at least two NPV calculations as of Time 0.
Does an option give the buyer the right or abligation to do something
right
S1
stock prive at expiration
Call option value calculation
stock value - present value of exercise price
same meaning as warrant
sweenteners or equity kickers
contigency planning
taking into account the managerial options implicit in a project
Strike price/ excercise price
the fixed price in the option contract at which the holder can buy or sell the underlying asset
correlation between exercise price and call worth
the higher the exercise price, the less the call is worth
correlation between time to expiration and option worth
the longer the time to expiration means the more the option is worth
conversion ratio
the number of shares per bond received for conversion into stock
S0
underlying asset, what is is worth on the day one of option
The maximum value of a call option can never exceed the:
underlying stock price.
Conversion Value
value a convertible bond qould have if it were to be immediately converted into common stock
C1
value of call option on the expiration date
Straight bond value
vaue a convertible bond would have if it could not be converted into common stock
intrinsic value
what the option would be worth if it were about to expire
ESO "under water"
when the stock falls significantly after an EDO is granted
Stock options are a (what kinda game)
zero-sum game
