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FINANCIAL MARKET COURSES

Options - Introduction to Option Valuation

Option valuation can be (ultimately) a very complex process; considerations include the option pricing factors, the way in which an option pays out, the market processes of underlying assets, and the relationships between multiple assets. It is at this point that the subject enters the esoteric realms of advanced mathematics. However, before embarking on any complex valuation, there are a number of fundamental foundations.

 

This course examines these matters and also outlines the way in which prices can be 'enforced' by arbitrage possibilities. This absence of 'free lunches' is fundamental to most financial markets pricing, but in particular options.

  • OBJECTIVES

    On completion of this course, you will be able to:

    Explain when an option is 'in' or 'out' of the money

    Show how an option price is broken into two components: intrinsic value and time value

    Describe the major influences on option values

    Outline the upper and lower boundaries of option prices and explain the factors affecting the exercise decision

    Describe the 'put-call' parity relationship

  • COURSE OUTLINE

    Topic 1: Option Moneyness

    Overview

    Forward Prices

    Option Moneyness – Summary

    Topic 2: Components of Option Value

    Option Value Before Expiry

    Time Value & Intrinsic Value

    Topic 3: Factors Affecting Option Value

    Factors Affecting Option Value – An Overview

    o Interest Rates

    o Relationship between the Strike Price & Asset Price

    o Maturity

    o Volatility of the Underlying Asset

    o Effect of a rise in Volatility

    Topic 4: Ongoing Position & Trade Management

    A Synthetic Purchase

    Put-Call Parity

    ATM Forward Prices

    No Arbitrage Rule

    Topic 5: Option Price Limits and Exercise Decisions

    Upper Boundary for the Price of a Call Option

    Upper Boundary for the Price of a Put Option

    Lower Boundary for the Price of a Call Option (European)

    Lower Boundary for the Price of a Put Option (European)

    Boundaries of Option Pricing – Summary

    Rational Exercise of an Option

    American Options – Early Exercise (Calls)

    American Options – Early Exercise (Puts)

  • PREREQUISITE KNOWLEDGE

  • ESTIMATED COMPLETED TIME

    75 Minutes

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