金融工程英文课件：Chapter3 Principles of option pricing.ppt

Principles of option pricing The minimum value of a call A call option is a instrument with limited liability. The holder can not be forced to exercise it. Therefore For an American call, the minimum value is dominated by a much stronger statement: The minimum value of an option is called its intrinsic value, sometimes referred to as parity value, parity or exercise value. The difference between the price and the intrinsic value is called time value. The maximum value of a call The value of a call at expiration The effect of time to expiration The longer-lived call has more time value because it has more chance to exercise and to make a bigger profit. Therefore The effect of exercise price Limits on the difference in premiums For a European call, For an American call, The lower bound of a European call Picture 3.4 The effect of dividends American call versus European call An American call will be at least as valuable as European call with the same terms. The exercises of American calls An American call on a non-dividend-paying stock will never be exercised early, because For American calls on dividend-paying stocks, the early exercise may happen. The effect of interest rates When interest rates increase, calls are more attractive to buyers so they will have higher prices. The effect of stock volatility Greater volatility increases the gains on the call if the stock price increases. On the other hand, if the stock price goes down, the potential loss is limited. So the investors are willing to pay higher premiums on options with greater volatility. The minimum value of a put The maximum of a put The value of a put at expiration The effect of time to expiration The effect of exercise price Limits on the difference in premiums The lower bound of a European put American put versus European put The early exercise of American puts Put-call parity The effect of interest rates Higher interest rates make puts less attractive to the buyer of a put. This