Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Chapter 25 - Option Valuation
25-1
CHAPTER 25
OPTION VALUATION
CHAPTER WEB SITES
Section
Web Address
CHAPTER ORGANIZATION
25.1 Put-Call Parity
25.2 The Black-Scholes Option Pricing Model
25.3 More about Black-Scholes
25.4 Valuation of Equity and Debt in a Leveraged Firm
25.5 Options and Corporate Decisions: Some Applications
25.6 Summary and Conclusions
Chapter 25 - Option Valuation
25-2
ANNOTATED CHAPTER OULTINE
25.1 Put-Call Parity
Terminology Review:
Call – right, but not the obligation, to buy the underlying asset at the specified
Exercise or strike price – price specified in the option contract
A. Protective Puts
The strategy:
Stock Price
Put Value
Combined Value
Total Gain or Loss
B. An Alternative Strategy
Chapter 25 - Option Valuation
25-3
Stock Price
Call Value
T-bill
39.02(1.025)
Combined Value
Total Gain or Loss
C. The Result
D. Continuous Compounding: A Refresher Course
Chapter 25 - Option Valuation
25-4
Time value of money calculations with continuous compounding:
25.2 The Black-Scholes Option Pricing Model
A. The Call Option Pricing Formula
Chapter 25 - Option Valuation
25-5
B. Put Option Valuation
Lecture Tip: The Black-Scholes model can also be adjusted to
solve for the value of a put option directly.
Chapter 25 - Option Valuation
25-6
25.3 More on Black-Scholes
Table 25.4 illustrates the relationship between option values and
the five major inputs.
A. Varying the Stock Price
Lecture Tip: Delta is the first derivative of the OPM with respect
to S. Gamma is the second derivative with respect to S.
Chapter 25 - Option Valuation
25-7
B. Varying the Time to Expiration
The relationship between option value and time to expiration is
called theta.
C. Varying the Standard Deviation
Chapter 25 - Option Valuation
25-8
D. Varying the Risk-Free Rate
E. Implied Standard Deviations
We can observe option values, underlying asset values, exercise
25.4 Valuation of Equity and Debt in a Leveraged Firm
A. Valuing the Equity in a Leveraged Firm
Chapter 25 - Option Valuation
25-9
B. Options and the Valuation of Risky Bonds
25.5 Options and Corporate Decisions: Some Applications
A. Mergers and Diversification
Chapter 25 - Option Valuation
25-10
stockholders to the bondholders.
B. Options and Capital Budgeting
Lecture Tip: Bondholders recognize the desire of stockholders to
25.6 Summary and Conclusions
