,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,Click to edit Master title style,Copyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hill Education.,23-,CHAPTER 23,OPTIONS AND CORPORATE FINANCE,Copyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hill Education.,CHAPTER 23OPTIONS AND CORPORAT,Lay out the basics of call and put options and explain how to calculate their payoffs and profits,List the factors that affect option values and show how to price call and put options using no arbitrage conditions,Explain the basics of employee stock options and their benefits and disadvantages,Value a firms equity as a call option on the firms assets,Value options in capital budgeting projects,including timing options,the option to expand,the option to abandon,and the option to contract,Define the basics of convertible bonds and warrants and how to value them,Copyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hill Education.,Key Concepts and Skills,Lay out the basics of call and,Options:The Basics,Fundamentals of Option Valuation,Valuing a Call Option,Employee Stock Options,Equity as a Call Option on the Firms Assets,Options and Capital Budgeting,Options and Corporate Securities,Chapter Outline,Copyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hill Education.,Options:The BasicsChapter Out,Call,Put,Strike or Exercise price,Expiration date,Option premium,Option writer,American Option,European Option,Option Terminology,Copyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hill Education.,CallOption TerminologyCopyrigh,Look at Table 23.1 in the book.,Price and volume information for calls and puts with the same strike and expiration is provided on the same line.,Things to notice,Prices are higher for options with the same strike price but longer expirations.,Call options with strikes less than the current price are worth more than the corresponding puts.,Call options with strikes greater than the current price are worth less than the corresponding puts.,Stock Option Quotations,Copyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hill Education.,Look at Table 23.1 in the book,The value of the call at expiration is the intrinsic value.,Max(0,S-E),S is the underlying asset price,E is the exercise price,If SE,then the payoff is S E,Assume that the exercise price is$30.,Option Payoffs Calls,Copyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hill Education.,The value of the call at expir,The value of a put at expiration is the intrinsic value.,Max(0,E-S),If SE,then the payoff is 0,Assume that the exercise price is$30.,Option Payoffs,Puts,Copyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hill Education.,The value of a put at expirati,Where can we find option prices?,On the Internet,of course.One site that provides option prices is Yahoo!Finance.,Go to,Yahoo!Finance,.,Enter a ticker symbol,then click on the options tab to get a basic quote.,Work the Web Example,Copyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hill Education.,Where can we find option price,Upper bound,Call price must be less than or equal to the stock price.,Lower bound,Call price must be greater than or equal to the stock price minus the exercise price or zero,whichever is greater(i.e.,the options intrinsic value).,If either of these bounds are violated,there is an arbitrage opportunity.,Call Option Bounds,Copyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hill Education.,Upper boundCall Option BoundsC,Figure 23.2,Copyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hill Education.,Figure 23.2Copyright 2019 Mc,An option is“in-the-money”if the payoff is greater than zero.,If,a call option is sure to finish in-the-money,the option value would be:,C,0,=S,0,PV(E),If the call is worth something other than this,then there is an arbitrage opportunity.,A Simple Model,Copyright 2019 McGraw-Hill Education.All rights reserved.No reproduction or distribution without the prior written consent of McGraw-Hill Education.,An option is“in-the-money”if,Stock price,As the stock price increases,the call price increases and the put price decreases.,Exercise price,As the