Options and Options Pricing
The first section of this chapter discusses the basic features of option contracts, with special reference to stock options, including the way in which the contractual elements of an option (such as the maturity or exercise price) have been standardized to facilitate trading. The second section examines various methods of valuing options contracts and how the value of a option will be influenced by its maturity, striking price, market interest rates and the price of the underlying security; it also explores the ways in which call and put options may be combined to form various types of ‘spreads’ and ‘straddles’. The last three sections are quite short: the third briefly analyzes the way in which options might be used to hedge a portfolio of stocks, and hence their role as a risk management tool; the fourth explains how the shares in a levered firm can themselves be viewed as a type of option, and the implications of this for the pricing of stocks; and the last discusses options on objects other than stocks. The examples given refer to the USA and Europe.
Keywords: Europe, hedging, interest rates, maturity, option contracts, option pricing, options, portfolios, prices, risk management, securities, shares, stock options, stock pricing, striking price, USA, valuation
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