Tài chính doanh nghiệp - Chapter 20: Options

Chapter 20OptionsWebsites:www.asx.com.auLearning objectivesUnderstand the structure and operation of option contracts and the types availableExplain the profit and loss payoff profiles of call and put option contractsDescribe the structure and organisation of international and Australian options marketsExplain the factors affecting the price of optionsDevelop options strategies for hedging price riskDiscuss the advantages and disadvantages of option contracts in managing riskChapter organisation20.1 The nature of options20.2 Option profit and loss payoff profiles20.3 Organisation of the market20.4 Factors affecting an option contract premium20.5 Option risk management strategies20.6 Conclusion20.7 Summary20.1 The nature of optionsOptions differ from futures because they provide asymmetric cover against price movementsOptions limit the effects of adverse price movements without reducing profits from favourable price movementsOptions involve the payment of a premium by the buyer to the seller (writer)(cont.)20.1 The nature of options (cont.)An option gives the buyer the right, but not the obligation, to buy or sell a specified commodity or financial instrument at a predetermined price (exercise or strike price), on or before a specified date (expiration date)An option will be exercised only if it is in the buyer’s best interests(cont.)20.1 The nature of options (cont.)Types of optionsCall optionsGive the option buyer the right to buy the commodity or instrument at the exercise pricePut optionsGive the buyer the right to sell the commodity or instrument at the exercise priceOptions can be exercised either:only on expiration date (European); orany time up to expiration date (American)(cont.)20.1 The nature of options (cont.)PremiumThe price paid by an option buyer to the writer (seller) of the optionExercise price or strike priceThe price specified in an options contract at which the option buyer can buy or sellChapter organisation20.1 The nature of options20.2 Option profit and loss payoff profiles20.3 Organisation of the market20.4 Factors affecting an option contract premium20.5 Option risk management strategies20.6 Conclusion20.7 Summary20.2 Option profit and loss payoff profilesCall option profit and loss payoff profilesExample: a call option for shares in a listed company at a strike or exercise price (X) of $12, and a premium (P) of $1.50Figure 20.1 indicates the profit and loss profiles of a call option for (a) the buyer or holder (long call) and (b) the writer or seller (short call)The critical break points of the market price of the share (S) at expiration date are $13.50If S (market price of asset) > X (i.e. > $12) , option is ‘in the money’(cont.)20.2 Option profit and loss payoff profiles (cont.)(cont.)20.2 Option profit and loss payoff profiles (cont.)(cont.)20.2 Option profit and loss payoff profiles (cont.)Call option profit and loss payoff profiles (cont.)The value of the option to the buyer or holder (long call party) is: V = max(S - X, 0) - PThe value of the option to the writer (short call party) is: V = P - max(S - X, 0)(cont.)20.2 Option profit and loss payoff profiles (cont.)Put option profit and loss payoff profilesExample: a put option for shares in a listed company at a strike or exercise price (X) of $12, and premium (P) of $1.50Figure 20.2 indicates the profit and loss profiles of a put option for (a) the buyer or holder (long put) and (b) the writer or seller (short put)The critical break points of the market price of the share (S) at expiration date are $12Buyer exercises option if S lower present value of profit if exercisedNegative relationship between interest rates and the price of a putOpportunity cost of holding assetLower present value of the profit if exercisedChapter organisation20.1 The nature of options20.2 Option profit and loss payoff profiles20.3 Organisation of the market20.4 Factors affecting an option contract premium20.5 Option risk management strategies20.6 Conclusion20.7 Summary20.5 Option risk management strategiesSingle-option strategiesExample: long asset (i.e. bought) and bearish (negative) about future asset priceStrategyLimit downside risk by writing (selling) a call option, i.e. short callFigure 20.5 and Table 20.4 in the textbook illustrate the profit profile of this strategy(cont.)20.5 Option risk management strategies (cont.)(cont.)20.5 Option risk management strategies (cont.)(cont.)20.5 Option risk management strategies (cont.)Single-option strategies (cont.)Example: short asset (i.e. sold) and bullish (positive) about future asset priceStrategyBuy a call in the underlying asset (i.e. take a long-call position)Figure 20.6 and Table 20.5 in the textbook illustrate the profit profile of this strategy(cont.)20.5 Option risk management strategies (cont.)Combined-options strategiesExample: very bullish about future price of the assetStrategy: ‘vertical bull spread’—contracts with same expiration dates, different exercise pricesWrite (sell) a put option and earn a premium to benefit from fall in spot priceHold (buy) a call option with exercise price greater than written putEffect: Offsets high premium associated with callFigure 20.7 in the textbook illustrates the profit profile(cont.)20.5 Option risk management strategies (cont.)(cont.)20.5 Option risk management strategies (cont.)Combined-options strategies (cont.)Example: quite bullish, but with some risk of a price fallStrategyHold (buy) a call option to benefit from fall in spot priceWrite (sell) a call option with a higher exercise price than the long callThis ‘call bull spread’ limits the potential lossFigure 20.8 in the textbook illustrates the profit profile(cont.)20.5 Option risk management strategies (cont.)Combined-options strategies (cont.)Example: very bearish about the future price of the assetStrategyHold (buy) put option to benefit from fall in spot priceWrite (sell) a call option with a higher exercise price than the long putThis ‘vertical bear spread’ limits the potential gain but exposes the writer to unlimited lossesFigure 20.9 in the textbook illustrates the profit profile(cont.)20.5 Option risk management strategies (cont.)Combined-options strategies (cont.)Example: quite bearish, but with some risk of a price riseStrategyHold (buy) put option to benefit from fall in spot priceWrite (sell) a put option with a lower exercise price than the long putThis ‘put bear spread’ limits the potential loss if the price risesFigure 20.10 in the textbook illustrates the profit profile(cont.)20.5 Option risk management strategies (cont.)Combined-options strategies (cont.)Example: expectation of increased price volatility, with no trend StrategyHold (buy) a put optionHold (buy) a call option with common exercise price‘Long straddle’ provides positive pay-off for both large upward and downward price movementsIf prices remain unchanged, individual makes loss equal to sum of premiumsFigure 20.11 in the textbook illustrates the profit profile(cont.)20.5 Option risk management strategies (cont.)Combined-options strategies (cont.)Example: expectation of increased volatility, without trend, with stagnationStrategyHold (buy) call option with out-of-the-money exercise priceHold (buy) put option with out-of-the-money exercise priceWith ‘long strangle’ loss is decreased if price remains unchanged, compared with ‘long straddle’Figure 20.12 in the textbook illustrates the profit profile(cont.)20.5 Option risk management strategies (cont.)Combined-options strategies (cont.)Example: expectation of asset price stabilityStrategyTake opposite position to long straddle and long strangleStrategy I: Short straddleSell call and put options with same exercise priceStrategy II: Short strangleSell call and put options, both out of the moneyFigure 20.13 in the textbook illustrates the profit profiles(cont.)20.5 Option risk management strategies (cont.)Combined-options strategies (cont.)Barrier options: knock-out and knock-in optionsAnother form of option strategy suited to the management of FX risk exposuresKnock-out option:is extinguished if a specified spot exchange rate barrier is breachedKnock-in option:is created if a specified spot exchange rate is achievedThe barrier rate can be set above or below the current spot FX rateAs the barrier limits the exposure of the writer, the premium is not as high as it is with a straight option(cont.)20.5 Option risk management strategies (cont.)Chapter organisation20.1 The nature of options20.2 Option profit and loss payoff profiles20.3 Organisation of the market20.4 Factors affecting an option contract premium20.5 Option risk management strategies20.6 Conclusion20.7 Summary20.6 ConclusionThe potential gains and losses to buyers and sellers of futures contracts are different from those of optionsOptions provide one-sided price protection that is not available through futuresThe option buyer limits losses and allows profits to accumulateHowever, the premium may be quite highChapter organisation20.1 The nature of options20.2 Option profit and loss payoff profiles20.3 Organisation of the market20.4 Factors affecting an option contract premium20.5 Option risk management strategies20.6 Conclusion20.7 Summary20.7 SummaryThe holder of an option (long party) has the right to buy (call) or sell (put) the commodity at a specified exercise priceThe writer (seller) is the short partyASX trades standardised options, unlike over-the-counter marketThe premium paid to buy an option is affected by its intrinsic value, time value, price volatility, and interest ratesA broad array of option strategies may be adopted by hedgers and speculators