Share options and option pricing (part 4) – ACCA (AFM) lectures
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To use the log function in the exam is =log((S.P/E.P),EXP(1))
This is the first time I have used Open Tuition. I have used two paid providers in the passed and these lectures are a lot easier to follow and the content much easier to absorb. Anybody looking to start their accountancy qualification I will be recommending to use this platform. Thank you John for this masterclass and to the efforts of your colleagues.
Thank you very much for your comment 馃檪
John, for questions relating to the delta hedge will the BSOPM calculator be provided? I presume the number of options to sell formula will not be provided though? Thanks
That is correct 馃檪
Hi John, for questions relating to the delta hedge will the BSOPM calculator be provided? I presume the number of options to sell formula will not be provided though? Thanks
Just wanted to say, John is an exceptional lecturer. I’ve been using a paid online course provider to this point and there’s a massive difference in the standard of lecturer. John goes through the content at the perfect pace and references problems in the first person which I find brilliant. A job very well done, very much appreciated, actually enjoying studying again. Thank you very much!!
Thank you very much for your comment 馃檪
Dear John,
Thank you very much for the lecture. I want to understand one moment about the Delta Hedge. If the price goes down, it will work. But if the price goes up, the option price also goes up, and I’ll have to buy them later at a higher price to close the deal. So how can I be sure that I’ll make a profit in this case?
The options hedge the risk.
So if the share price goes down then the loss is cancelled out by the profit on the options. If the share price goes up then the profit is cancelled out by the loss on the options. So the end result is you are not affected by changes in the share price whatever happens to the price.
Why do we divide number of shares by N(d1) to calculate number of options in example 5? I don’t get the idea behind it.
Hello Sir,
Is Dark pool trading system not covered in any of your lectures ?
Dear Sir, please advise how can we assess a volatility of a new project, in order to apply the real option model based on Black-Scholes? Thank you in advance for your answer!
The question will tell you the volatility 馃檪
Who do we calculate the number of put options to buy or sell ? do we use the same N(d1) used for call options ?
Yes 馃檪
sir, for the theory aspect, does the company have to make sure it has enough options available on hand to mitigate the risk? how does it determine the right amount of options for shield it from any exceptional circumstances, etc, if it doesnt have enough to cancel out, does this effectively result in a loss in shareholder value (as investors may possibly want to know the risk attitude of a company)
It is investors, not the company, who may choose to use options as a way of reducing the risk to them of changes in the share price.
Hey John.
I wanted to ask that do we also have to assume the fall in share price like you’ve done in example 5 . Pa falls 10cents . So will this be given in exam or we just have to assume??
Kind Regards.
I don’t assume any fall in the share price in answering what example 5 requires, and neither would you need to in the exam.
I only mention what happens if the share price falls by 10c in order to explain the logic behind a delta hedge. It is awful at this level of exam to simply learn a rule without understanding the idea behind it 馃檪
Dear Sir,
I would like to know if you have covered “equity holders having a call option with FV of debt as exercise price” concept as this concept is a bit tricky to understand.
Thank you.
Sorry! I am really confused right now. Why can you sell more call options than you own shares? When you sell the call options doesn’t that mean the person you sell them to has the right to buy the shares you are selling when the exercise time hits?
Buying and selling options is a completely separate transaction from buying and selling shares. Options are traded on the stock exchange and you can buy and sell them just as you can buy and sell shares.
Although an option is the right to buy shares, you don’t have to exercise the option – if you have bought an option then later you can sell the option. The person you sell it the option to does have the right to buy shares if they want, but they do not buy the shares from you – they buy them from the option dealer.
Hmm, But then based on Example 5, the delta hedge Martin does to sell 4k call options that is an additional call option he owns on top of the 1000 shares?
No – as I explain in the lectures, you can sell options and then buy back later (just like you can sell shares that you don’t own, provided that you buy them back later)
Hello Sir,
First of all thank you so much for your very useful lectures :). In case of a put option how we calculate the Delta Hedge?!
Thank you in advance.
Silvana
If in an exam question, you will be told how to 馃檪
does this mean that N(d1) is like a constant?
No – you get it from the tables provided, as explained in the lecture.