Share options and option pricing (part 3) – ACCA (AFM) lectures
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Wow this is such a great lecture. I particularly like how you use the first letters of the greeks to remind us of the meaning. Please sir i was wondering why we use risk free rate in the formula for the value of an option. Thank you so much
My dear i need extra clarification about Delta hedging-Sell call option to buy later –is that mean receiving price of call option to repurchase the share later as Exchanging ?
Sorry for my confusion,who is responsible at last to take over share options ?
In share options business dealings is there subscription or agreement ?
Hello Sir,
Is this lecture note still valid for September 2021 Exams?
great lecture! but i just want to confirm, so we are using the BSOP model to calculate the option price. So the option price is actually a premium? we are actually calculating the premium paid? sorry for getting confuse on the easy part
It is the cost of buying the option (which we call a premium 馃檪 )
oh i see. thank you so much! 馃檪
You are welcome 馃檪
is that mean option price is C -computed price of call option ,the rate the premium changes as changing current price factored by Nd1.
I dont understand the whether premium derived from whrere .becuase i considred it fixed in dealings
The premium will change from day to day (just as the price of shares changes from day to day).
Hi John, thank you for the great lectures.
I have a question re example 4 – I have looked a the answers on the back but not sure why mines are different.
My Answer
D1 = ln(150/180)+[(0.1+0.5(0.2)虏)x0.25) / 0.4?0.1
= -0.18232 + 0.045 / 0.12649
= -1.08562
However, your answer gives -0.6886 for D1?
I’ve tried this over a few times and can’t find where I’ve gone wrong. Can you please help with this?
Thank you
The workings at the back are mistyped, but the answer is correct.
Your mistake is that in the denominator (s x sq root of t) you have used t to be 0.1, whereas it should be 0.25.
(Also you have mistyped in the first line and used s as 0.2 instead of 0.4, but that is just your typing – you have used the right figure in your calculation 馃檪 )
Hi John,
Thanks for the excellent lecture.
Just wondering when the share price falls, price of call option falls, but will the price of put option increase?
Also, when delta hedging, (if we are worried about share price might fall), we take short position on Call options, are we able to take long position on Put options – so we have the right to sell them at a fixed price? Or Delta hedging only applies to Call options?
Many thanks in advance!
Yes – the price of put options will increase.
In the exam we only use delta hedges with all options unless the question says to use put options, in which case the question will tell you what to do 馃檪
Hello Sir,
Is this lecture note still valid for September 2021 Exams?
You mention selling options now to profit off of share prices dropping. So does assume we already are holding an amount of options on hand?
No. You can sell first and then buy later, just as you can with shares.
Hey John, if the Pa changes so will N(d1), right? as d1 is influenced by Pa and the volatility. So how are we assuming that in the short term only Pa will change and not d1??
The same logic applies for d2 as well, as its dependent on d1.
Thanks.
Because in the very short term we assume the other factors will remain constant. However, as I say in the lecture, in the longer term they certainly will change.
Thanks 馃檪
You are welcome 馃檪
Hello Sir,
In example 1 part (b) – when the share price after 3 months is $1.5 we decide not to exercise the option. But we also discussed that while entering into call option @ E.P of $1.8 we will have to pay entire amount irrespective whether we exercise the option. So can you please elaborate more on what will happen to $1.8 already paid ? and do we have to buy shares @ $1.5 again or is it adjustable with $1.8 ?
Thank you in advance.
The option is the right to buy the share for $1.80.
If you choose to exercise it then you pay $1.80 for the share. If you decide not to exercise it then you do not pay $1.80 and if you buy the share you pay whatever the share price is.