Part 5:  Options and Option Valuation Chapter 20 Introduction to options What is an option? Why buy a call? Why buy a put option? General properties of option prices Writing options, shorting stock Option strategies Spreads and butterflies Excel functions:  Max, Min Chapter 21 Option pricing facts Fact 1:  Call price C0 > Max[S0 – PV(X),0] Fact 2:  Don’t early-exercise calls! Fact 3:  Put-call parity:  P0 = C0 + PV(X) - S0 Fact 4:  American put price bound P0 > Max[X – S0, 0] Fact 5:  Bounds on European put price:  P0 > Max[PV(X) – S0, 0] Fact 6:  Early-exercise of puts might be optimal Fact 7:  Option prices are convex Excel functions:  Max, Sum, If PPT for Chapter 21 Chapter 22 The Black-Scholes formula Black-Scholes model Computing  option volatility from stock prices Implied volatility An Excel Black-Scholes function Sensitivity analysis on Black-Scholes formula Does Black-Scholes work?  Applying it to the data Real options Excel functions:  Exp, Date, Ln, Stdevp, Varp, Data Table PPT for Chapter 22 Chapter 23 Binomial option pricing Binomial option pricing model What can you learn from the binomial model? Multiperiod binomial model Using binomial model to price an American put Excel functions:  Max PPT for Chapter 23