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October 30, 2020 at 5:38 pm
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
John Moffat says
October 31, 2020 at 10:38 am
It is the cost of buying the option (which we call a premium 🙂 )
October 31, 2020 at 5:29 pm
oh i see. thank you so much! 🙂
November 1, 2020 at 8:35 am
You are welcome 🙂
June 10, 2020 at 11:35 am
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)²)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?
June 10, 2020 at 3:24 pm
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 🙂 )
March 8, 2020 at 1:55 pm
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!
March 8, 2020 at 6:44 pm
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 🙂
July 20, 2019 at 6:19 am
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?
July 20, 2019 at 8:54 am
No. You can sell first and then buy later, just as you can with shares.
August 26, 2018 at 10:25 pm
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.
August 27, 2018 at 8:28 am
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.
August 27, 2018 at 10:47 am
August 27, 2018 at 7:24 pm
July 14, 2018 at 12:57 pm
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.
July 15, 2018 at 9:07 am
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.
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