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

PPT
for Chapter 20

Chapter 21
Option pricing facts

Fact
1: Call price C_{0} > Max[S_{0}
– PV(X),0]
Fact 2: Don’t earlyexercise calls!
Fact 3: Putcall parity: P_{0} = C_{0} + PV(X)  S_{0}
Fact 4: American put price bound P_{0}
> Max[X – S_{0}, 0]
Fact 5: Bounds on European put
price: P_{0} > Max[PV(X) –
S_{0}, 0]
Fact 6: Earlyexercise of puts might
be optimal
Fact 7: Option prices are convex
Excel
functions: Max, Sum, If

PPT
for Chapter 21

Chapter 22
The BlackScholes formula

BlackScholes
model
Computing option volatility from stock prices
Implied volatility
An Excel BlackScholes function
Sensitivity analysis on BlackScholes formula
Does BlackScholes 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
